US Internal Revenue Service: p946 - 2005

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Department of the Treasury Contents

Internal Revenue Service What’s New . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Important Reminders . . . . . . . . . . . . . . . . . . . . . . . 2
Publication 946 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Cat. No. 13081F
1. Overview of Depreciation . . . . . . . . . . . . . . . . . . 3
What Property Can Be Depreciated? . . . . . . . . . 3
How To What Property Cannot Be Depreciated? . . . . . . .
When Does Depreciation Begin and End? . . . . .
Can You Use MACRS To Depreciate Your
5
7
Depreciate Property? . . . . . . . . . . . . . . . . . . . . . . . . . . .
What Is the Basis of Your Depreciable
Property? . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
11
Property How Do You Treat Improvements? . . . . . . . . . . .

Do You Have To File Form 4562? . . . . . . . . . . . .
How Do You Correct Depreciation
12
12
• Section 179 Deduction Deductions? . . . . . . . . . . . . . . . . . . . . . . . . . 13
• Special Depreciation
2. Electing the Section 179 Deduction . . . . . . . . . . 15
What Property Qualifies? . . . . . . . . . . . . . . . . . . 15
What Property Does Not Qualify? . . . . . . . . . . . . 16
Allowance How Much Can You Deduct? . . . . . . . . . . . . . . . 17
• MACRS How Do You Elect the Deduction? . . . . . . . . . . .
When Must You Recapture the Deduction? . . . .
22
22
• Listed Property 3. Claiming the Special Depreciation
Allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
What Is Qualified Property? . . . . . . . . . . . . . . . . 23
For use in preparing How Much Can You Deduct? . . . . . . . . . . . . . . . 28
How Can You Elect Not To Claim an
2005 Returns Allowance? . . . . . . . . . . . . . . . . . . . . . . . . .
When Must You Recapture an
29
Allowance? . . . . . . . . . . . . . . . . . . . . . . . . . 29
4. Figuring Depreciation Under MACRS . . . . . . . . 30
Which Depreciation System (GDS or ADS)
Applies? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Which Property Class Applies Under
GDS? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
What Is the Placed-in-Service Date? . . . . . . . . . 33
What Is the Basis for Depreciation? . . . . . . . . . . 34
Which Recovery Period Applies? . . . . . . . . . . . . 34
Which Convention Applies? . . . . . . . . . . . . . . . . 36
Which Depreciation Method Applies? . . . . . . . . . 37
How Is the Depreciation Deduction
Figured? . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
How Do You Use General Asset
Accounts? . . . . . . . . . . . . . . . . . . . . . . . . . . 48
When Do You Recapture MACRS
Depreciation? . . . . . . . . . . . . . . . . . . . . . . . . 52
5. Additional Rules for Listed Property . . . . . . . . . 53
What Is Listed Property? . . . . . . . . . . . . . . . . . . 53
Can Employees Claim a Deduction? . . . . . . . . . . 55
What Is the Business-Use Requirement? . . . . . . 56
Do the Passenger Automobile Limits Apply? . . . . 60
What Records Must Be Kept? . . . . . . . . . . . . . . . 63
How Is Listed Property Information
Get forms and other information Reported? . . . . . . . . . . . . . . . . . . . . . . . . . . 65
faster and easier by: 6. How To Get Tax Help . . . . . . . . . . . . . . . . . . . . . 66
Internet • www.irs.gov Appendix A — MACRS Percentage Table
Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Appendix B — Table of Class Lives and

Recovery Periods . . . . . . . . . . . . . . . . . . . . . . . 94
Important Reminders
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
Photographs of missing children. The Internal Reve-
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 nue Service is a proud partner with the National Center for
Missing and Exploited Children. Photographs of missing
children selected by the Center may appear in this publica-
What’s New tion on pages that would otherwise be blank. You can help
bring these children home by looking at the photographs
Increased section 179 deduction dollar limit. The max- and calling 1-800-THE-LOST (1-800-843-5678) if you rec-
imum amount you can elect to deduct for most section 179 ognize a child.
property you placed in service in 2005 is $105,000
($140,000 for qualified enterprise zone, renewal commu- Property classification for qualified leasehold im-
nity, and New York Liberty Zone (Liberty Zone) property). provement and restaurant property. Qualified lease-
This limit is reduced by the amount by which the cost of the hold improvement property and qualified restaurant
property placed in service during the tax year exceeds property placed in service after December 31, 2005, will
$420,000. See Dollar Limits under How Much Can You not be treated as 15-year property under MACRS. See
Deduct in chapter 2. Which Property Class Applies Under GDS in chapter 4.
Increased section 179 limits for Gulf Opportunity Zone Recovery periods for Indian Reservation property.
property. If you placed in service section 179 property The shorter recovery periods for qualified property placed
that is qualified Gulf Opportunity Zone (GO Zone) property in service on an Indian reservation will not apply to prop-
acquired after August 27, 2005, the $105,000 section 179 erty placed in service after December 31, 2005. See Indian
deduction dollar limit and the $420,000 threshold used to Reservation Property under Which Recovery Period Ap-
figure any reduction in the amount for which you can make plies in chapter 4.
the section 179 election are increased. See Increased
dollar limits under Gulf Opportunity Zone (GO Zone) Prop-
erty in chapter 2. Introduction
Limited applicability of special depreciation allow- This publication explains how you can recover the cost of
ance. The additional special depreciation allowance (in- business or income-producing property through deduc-
cluding the increased limits for passenger automobiles) tions for depreciation (for example, the special deprecia-
only applies to certain property placed in service in 2005. tion allowance and deductions under the Modified
You can claim a special allowance for certain aircraft, Accelerated Cost Recovery System (MACRS)). It also
certain property with a long production period, and quali- explains how you can elect to take a section 179 deduc-
fied Liberty Zone property you placed in service in 2005. tion, instead of depreciation deductions, for certain prop-
You can also claim a special allowance for qualified GO erty and the additional rules for listed property.
Zone property you acquired after August 27, 2005. See
chapter 3, Claiming the Special Depreciation Allowance, The depreciation methods discussed in this pub-
later. !
CAUTION
lication generally do not apply to property placed
in service before 1987. If you want information
Recovery periods for certain natural gas gathering about depreciating such property, see Publication 534.
and transmission lines and electric transmission
property. Certain natural gas gathering lines placed in Definitions. Many of the terms used in this publication are
service after April 11, 2005, are treated as 7-year property defined in the Glossary near the end of the publication.
under MACRS. In addition, certain electric transmission Glossary terms used in each discussion under the major
property and natural gas distribution lines placed in service headings are listed before the beginning of each discus-
after April 11, 2005, are treated as 15-year property under sion throughout the publication.
MACRS. See Which Property Class Applies Under GDS
and Which Recovery Period Applies in chapter 4.
Do you need a different publication? The following ta-
Depreciation limits on business vehicles. The total ble shows where you can get more detailed information
section 179 deduction and depreciation you can deduct for when depreciating certain types of property.
a passenger automobile (that is not an electric vehicle or a
truck or van) you use in your business and first placed in For information See Publication:
service in 2005 is $2,960. The maximum deduction for an on depreciating:
electric vehicle is $8,880. The maximum deduction you A car 463, Travel, Entertainment, Gift, and
can take for a truck or van you use in your business and Car Expenses
first placed in service in 2005 is $3,260. See Maximum
Depreciation Deduction in chapter 5. Residential rental
527, Residential Rental Property
property
Office space in 587, Business Use of Your Home
your home (Including Use by Daycare Providers)
Farm property 225, Farmer’s Tax Guide
Page 2
Comments and suggestions. We welcome your com- Useful Items

ments about this publication and your suggestions for You may want to see:
future editions.
You can write to us at the following address: Publication
Internal Revenue Service ❏ 534 Depreciating Property Placed in Service

Business Forms and Publications Branch Before 1987
SE:W:CAR:MP:T:B ❏ 535 Business Expenses
1111 Constitution Ave. NW, IR-6406
Washington, DC 20224 ❏ 538 Accounting Periods and Methods
❏ 551 Basis of Assets
We respond to many letters by telephone. Therefore, it
would be helpful if you would include your daytime phone Form (and Instructions)
number, including the area code, in your correspondence.
❏ Sch C (Form 1040) Profit or Loss From Business
You can email us at *[email protected]. (The asterisk
must be included in the address.) Please put “Publications ❏ Sch C-EZ (Form 1040) Net Profit From Business
Comment” on the subject line. Although we cannot re- ❏ 2106 Employee Business Expenses
spond individually to each email, we do appreciate your
feedback and will consider your comments as we revise ❏ 2106-EZ Unreimbursed Employee Business
our tax products. Expenses
Tax questions. If you have a tax question, visit ❏ 3115 Application for Change in Accounting Method
www.irs.gov or call 1-800-829-1040. We cannot answer ❏ 4562 Depreciation and Amortization
tax questions at either of the addresses listed above.
Ordering forms and publications. Visit www.irs.gov/ See chapter 6 for information about getting publications
formspubs to download forms and publications, call and forms.
1-800-829-3676, or write to the National Distribution
Center at the address shown under How To Get Tax Help
in chapter 6.
What Property Can Be
Depreciated?
Terms you may need to know
1. (see Glossary):
Overview of Adjusted basis
Depreciation Basis
Commuting
Disposition
Introduction Fair market value
Depreciation is an annual income tax deduction that allows
Intangible property
you to recover the cost or other basis of certain property
over the time you use the property. It is an allowance for Listed property
the wear and tear, deterioration, or obsolescence of the
Placed in service
property.
This chapter discusses the general rules for depreciat- Tangible property
ing property. It explains the following. Term interest
• What property can be depreciated. Useful life
• What property cannot be depreciated.
• When depreciation begins and ends. You can depreciate most types of tangible property (except
• Whether MACRS can be used to figure depreciation. land), such as buildings, machinery, vehicles, furniture,
and equipment. You also can depreciate certain intangible
• What the basis of property is. property, such as patents, copyrights, and computer
• How to treat improvements. software.
• When to file Form 4562. To be depreciable, the property must meet all the follow-
ing requirements.
• How to correct depreciation claimed incorrectly in a
previous year. • It must be property you own.
Chapter 1 Overview of Depreciation Page 3
• It must be used in your business or income-produc- Cooperative apartments. If you are a tenant-stockholder
ing activity. in a cooperative housing corporation and use your cooper-
ative apartment in your business or for the production of
• It must have a determinable useful life. income, you can depreciate your stock in the corporation,
• It must be expected to last more than one year. even though the corporation owns the apartment.
Figure your depreciation deduction as follows.
The following discussions provide information about these
requirements. 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
Property You Own your cooperative stock after its first offering, figure
To claim depreciation, you usually must be the owner of the depreciable basis of this property as follows.
the property. You are considered as owning property even a. Multiply your cost per share by the total number of
if it is subject to a debt. outstanding shares, including any shares held by
the corporation.
Example 1. You made a down payment to purchase
rental property and assumed the previous owner’s mort- b. Add to the amount figured in (a) any mortgage
gage. You own the property and you can depreciate it. debt on the property on the date you bought the
stock.
Example 2. You bought a new van that you will use only c. Subtract from the amount figured in (b) any mort-
for your courier business. You will be making payments on gage debt that is not for the depreciable real prop-
the van over the next 5 years. You own the van and you erty, such as the part for the land.
can depreciate it.
2. Subtract from the amount figured in (1) any deprecia-
Leased property. You can depreciate leased property tion for space owned by the corporation that can be
only if you retain the incidents of ownership in the property rented but cannot be lived in by tenant-stockholders.
(explained below). This means you bear the burden of
exhaustion of the capital investment in the property. There- 3. Divide the number of your shares of stock by the
fore, if you lease property from someone to use in your total number of outstanding shares, including any
trade or business or for the production of income, you shares held by the corporation.
generally cannot depreciate its cost because you do not 4. Multiply the result of (2) by the percentage you fig-
retain the incidents of ownership. You can, however, de- ured in (3). This is your depreciation on the stock.
preciate any capital improvements you make to the prop-
Your depreciation deduction for the year cannot be
erty. See How Do You Treat Improvements later in this
more than the part of your adjusted basis in the stock of the
chapter and Additions and Improvements under Which corporation that is allocable to your business or
Recovery Period Applies in chapter 4. income-producing property. You must also reduce your
If you lease property to someone, you generally can depreciation deduction if only a portion of the property is
depreciate its cost even if the lessee (the person leasing used in a business or for the production of income.
from you) has agreed to preserve, replace, renew, and
maintain the property. However, if the lease provides that Example. You figure your share of the cooperative
the lessee is to maintain the property and return to you the housing corporation’s depreciation to be $30,000. Your
same property or its equivalent in value at the expiration of adjusted basis in the stock of the corporation is $50,000.
the lease in as good condition and value as when leased, You use one half of your apartment solely for business
you cannot depreciate the cost of the property. purposes. Your depreciation deduction for the stock for the
Incidents of ownership. Incidents of ownership in year cannot be more than $25,000 (1/2 of $50,000).
property include the following. Change to business use. If you change your coopera-
• The legal title to the property. tive apartment to business use, figure your allowable de-
preciation as explained earlier. The basis of all the
• The legal obligation to pay for the property. depreciable real property owned by the cooperative hous-
• The responsibility to pay maintenance and operating ing corporation is the smaller of the following amounts.
expenses. • The fair market value of the property on the date you
• The duty to pay any taxes on the property. change your apartment to business use. This is con-
sidered to be the same as the corporation’s adjusted
• The risk of loss if the property is destroyed, con- basis minus straight line depreciation, unless this
demned, or diminished in value through obsoles- value is unrealistic.
cence or exhaustion.
• The corporation’s adjusted basis in the property on
that date. Do not subtract depreciation when figuring
Life tenant. Generally, if you hold business or investment the corporation’s adjusted basis.
property as a life tenant, you can depreciate it as if you
were the absolute owner of the property. However, see If you bought the stock after its first offering, the
Certain term interests in property under Excepted Prop- corporation’s adjusted basis in the property is the amount
erty, later. figured in (1), above. The fair market value of the property
Page 4 Chapter 1 Overview of Depreciation

is considered to be the same as the corporation’s adjusted customers in the ordinary course of business, but are
basis figured in this way minus straight line depreciation, leased.
unless the value is unrealistic. If Maple buys cars at wholesale prices, leases them for
For a discussion of fair market value and adjusted basis, a short time, and then sells them at retail prices or in sales
see Publication 551. in which a dealer’s profit is intended, the cars are treated
as inventory and are not depreciable property. In this
Property Used in Your Business or situation, the cars are held primarily for sale to customers
in the ordinary course of business.
Income-Producing Activity
Containers. Generally, containers for the products you
To claim depreciation on property, you must use it in your sell are part of inventory and you cannot depreciate them.
business or income-producing activity. If you use property However, you can depreciate containers used to ship your
to produce income (investment use), the income must be products if they have a life longer than one year and meet
taxable. You cannot depreciate property that you use the following requirements.
solely for personal activities.
• They qualify as property used in your business.
Partial business or investment use. If you use property • Title to the containers does not pass to the buyer.
for business or investment purposes and for personal
purposes, you can deduct depreciation based only on the To determine if these requirements are met, consider
business or investment use. For example, you cannot the following questions.
deduct depreciation on a car used only for commuting,
personal shopping trips, family vacations, driving children • Does your sales contract, sales invoice, or other
to and from school, or similar activities. type of order acknowledgment indicate whether you
have retained title?
You must keep records showing the business,
investment, and personal use of your property. • Does your invoice treat the containers as separate
RECORDS For more information on the records you must items?
keep for listed property, such as a car, see What Records • Do any of your records state your basis in the con-
Must Be Kept in chapter 5. tainers?
Although you can combine business and invest-
! ment use of property when figuring depreciation
CAUTION deductions, do not treat investment use as quali- Property Having a Determinable
fied business use when determining whether the
business-use requirement for listed property is met. For Useful Life
information about qualified business use of listed property, To be depreciable, your property must have a determina-
see What Is the Business-Use Requirement in chapter 5. ble useful life. This means that it must be something that
Office in the home. If you use part of your home as an wears out, decays, gets used up, becomes obsolete, or
office, you may be able to deduct depreciation on that part loses its value from natural causes.
based on its business use. For information about depreci-
ating your home office, see Publication 587. Property Lasting More Than One Year
Inventory. You cannot depreciate inventory because it is To be depreciable, property must have a useful life that
not held for use in your business. Inventory is any property extends substantially beyond the year you place it in serv-
you hold primarily for sale to customers in the ordinary ice.
course of your business.
If you are a rent-to-own dealer, you may be able to treat Example. You maintain a library for use in your profes-
certain property held in your business as depreciable prop- sion. You can depreciate it. However, if you buy technical
erty rather than as inventory. See Rent-to-own dealer books, journals, or information services for use in your
under Which Property Class Applies Under GDS in chapter business that have a useful life of one year or less, you
4. cannot depreciate them. Instead, you deduct their cost as
In some cases, it is not clear whether property is held for a business expense.
sale (inventory) or for use in your business. If it is unclear,
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 What Property Cannot Be
results in different conclusions.
Depreciated?
Example. Maple Corporation is in the business of leas- Terms you may need to know
ing cars. At the end of their useful lives, when the cars are
no longer profitable to lease, Maple sells them. Maple does
(see Glossary):
not have a showroom, used car lot, or individuals to sell the
cars. Instead, it sells them through wholesalers or by Amortization
similar arrangements in which a dealer’s profit is not in-
Basis
tended or considered. Maple can depreciate the leased
cars because the cars are not held primarily for sale to Goodwill

Intangible property 4. Trademarks or trade names.

Remainder interest 5. The following property, unless you created it other
than in connection with acquiring assets constituting
Term interest
a business or a substantial part of a business.
Certain property cannot be depreciated. This includes the a. Patents and copyrights.
following. b. Customer or subscription lists, location contracts,
and insurance expirations.
Land c. Designs, patterns, and formats, including certain
computer software.
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, plant- Computer software. Computer software is a section
ing, and landscaping. 197 intangible only if you acquired it in connection with the
acquisition of assets constituting a business or a substan-
Land preparation costs. Although you cannot depreci- tial part of a business.
ate land, you can depreciate certain costs (such as land- However, computer software is not a section 197 intan-
scaping costs) incurred in preparing land for business use. gible and can be depreciated, even if acquired in connec-
These costs must be so closely associated with other tion with the acquisition of a business, if it meets all of the
depreciable property that you can determine a life for them following tests.
along with the life of the associated property.
• It is readily available for purchase by the general
Example. You constructed a new building for use in public.
your business and paid for grading, clearing, seeding, and
• It is subject to a nonexclusive license.
planting bushes and trees. Some of the bushes and trees
were planted right next to the building, while others were • It has not been substantially modified.
planted around the outer border of the lot. If you replace
the building, you would have to destroy the bushes and If the software meets the tests above, it may also qualify
trees right next to it. These bushes and trees are closely for the section 179 deduction and the special depreciation
associated with the building, so they have a determinable allowance, discussed later.
useful life. Therefore, you can depreciate them. Add your
other land preparation costs to the basis of your land Certain term interests in property. You cannot depreci-
because they have no determinable life and you cannot ate a term interest in property created or acquired after
depreciate them. July 27, 1989, for any period during which the remainder
interest is held, directly or indirectly, by a person related to
Excepted Property you. A term interest in property means a life interest in
property, an interest in property for a term of years, or an
Even if the requirements explained in the preceding dis- income interest in a trust.
cussions are met, you cannot depreciate the following Related persons. For a description of related persons,
property. see Related persons in the discussion on property owned
• Property placed in service and disposed of in the or used in 1986 under Can You Use MACRS To Depreci-
same year. (Determining when property is placed in ate Your Property later in this chapter. For this purpose,
service is explained later.) however, treat as related persons only the relationships
listed in items (1) through (10) of that discussion and
• Equipment used to build capital improvements. You substitute “50%” for “10%” each place it appears.
must add otherwise allowable depreciation on the
equipment during the period of construction to the Basis adjustments. If you would be allowed a depreci-
basis of your improvements. (See Uniform Capitali- ation deduction for a term interest in property except that
zation Rules in Publication 551.) the holder of the remainder interest is related to you, you
generally must reduce your basis in the term interest by
• Section 197 intangibles. any depreciation or amortization not allowed.
• Certain term interests. If you hold the remainder interest, you generally must
increase your basis in that interest by the depreciation not
Section 197 intangibles. You cannot depreciate section allowed to the term interest holder. However, do not in-
197 intangibles. Instead, you must amortize their cost. For crease your basis for depreciation not allowed for periods
information, see chapter 9 in Publication 535. during which either of the following situations applies.
Section 197 intangibles include the following types of • The term interest is held by an organization exempt
property. from tax.
1. Franchises. • The term interest is held by a nonresident alien indi-
vidual or foreign corporation, and the income from
2. Certain agreements not to compete.
the term interest is not effectively connected with the
3. Goodwill. conduct of a trade or business in the United States.

Exceptions. The above rules do not apply to the holder business or income-producing activity, then you can begin
of a term interest in property acquired by gift, bequest, or to depreciate it at the time of the change. You place the
inheritance. They also do not apply to the holder of divi- property in service on the date of the change.
dend rights that were separated from any stripped pre-
ferred stock if the rights were purchased after April 30, Example. You bought a home and used it as your
1993, or to a person whose basis in the stock is determined personal home several years before you converted it to
by reference to the basis in the hands of the purchaser. rental property. Although its specific use was personal and
no depreciation was allowable, you placed the home in
service when you began using it as your home. You can
When Does Depreciation begin to claim depreciation in the year you converted it to
rental property because its use changed to an income-pro-
Begin and End? ducing use at that time.
Terms you may need to know Idle Property

(see Glossary):
Continue to claim a deduction for depreciation on property
used in your business or for the production of income even
Basis if it is temporarily idle (not in use). For example, if you stop
Exchange using a machine because there is a temporary lack of a
market for a product made with that machine, continue to
Placed in service
deduct depreciation on the machine.
You begin to depreciate your property when you place it in Cost or Other Basis Fully Recovered
service for use in your trade or business or for the produc-
tion of income. You stop depreciating property either when You stop depreciating property when you have fully recov-
you have fully recovered your cost or other basis or when ered your cost or other basis. You recover your basis when
you retire it from service, whichever happens first. your section 179 and allowed or allowable depreciation
deductions equal your cost or investment in the property.
See What Is the Basis of Your Depreciable Property, later.
Placed in Service
You place property in service when it is ready and avail- Retired From Service
able for a specific use, whether in a business activity, an
income-producing activity, a tax-exempt activity, or a per- You stop depreciating property when you retire it from
sonal activity. Even if you are not using the property, it is in service, even if you have not fully recovered its cost or
service when it is ready and available for its specific use. other basis. You retire property from service when you
permanently withdraw it from use in a trade or business or
Example 1. Donald Steep bought a machine for his from use in the production of income because of any of the
business. The machine was delivered last year. However, following events.
it was not installed and operational until this year. It is
considered placed in service this year. If the machine had
• You sell or exchange the property.
been ready and available for use when it was delivered, it • You convert the property to personal use.
would be considered placed in service last year even if it
was not actually used until this year.
• You abandon the property.
• You transfer the property to a supplies or scrap ac-
Example 2. On April 6, Sue Thorn bought a house to count.
use as residential rental property. She made several re-
pairs and had it ready for rent on July 5. At that time, she
• The property is destroyed.
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.
Can You Use MACRS To
Example 3. James Elm is a building contractor who
Depreciate Your Property?
specializes in constructing office buildings. He bought a Terms you may need to know
truck last year that had to be modified to lift materials to (see Glossary):
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 Adjusted basis
placed in service on January 10, the date it was ready and Basis
available to perform the function for which it was bought.
Convention
Conversion to business use. If you place property in
Exchange
service in a personal activity, you cannot claim deprecia-
tion. However, if you change the property’s use to use in a Fiduciary

Grantor Improvements under Which Recovery Period Applies in

chapter 4.
Intangible property
Nonresidential real property Property Owned or Used in 1986
Placed in service
You may not be able to use MACRS for property you
Related persons acquired and placed in service after 1986 if any of the
Residential rental property situations described below apply. If you cannot use
MACRS, the property must be depreciated under the
Salvage value methods discussed in Publication 534.
Section 1245 property For the following discussions, do not treat prop-
Section 1250 property !
CAUTION
erty as owned before you placed it in service. If
you owned property in 1986 but did not place it in
Standard mileage rate service until 1987, you do not treat it as owned in 1986.
Straight line method
Personal property. You cannot use MACRS for personal
Unit-of-production method property (section 1245 property) in any of the following
Useful life situations.
1. You or someone related to you owned or used the

You must use the Modified Accelerated Cost Recovery property in 1986.
System (MACRS) to depreciate most property. MACRS is 2. You acquired the property from a person who owned
discussed in chapter 4. it in 1986 and as part of the transaction the user of
You cannot use MACRS to depreciate the following the property did not change.
property.
3. You lease the property to a person (or someone
• Property you placed in service before 1987. related to this person) who owned or used the prop-
• Certain property owned or used in 1986. erty in 1986.
• Intangible property. 4. You acquired the property in a transaction in which:
• Films, video tapes, and recordings. a. The user of the property did not change, and
• Certain corporate or partnership property acquired in b. The property was not MACRS property in the
a nontaxable transfer. hands of the person from whom you acquired it
because of (2) or (3) above.
• Property you elected to exclude from MACRS.
The following discussions describe the property listed
above and explain what depreciation method should be Real property. You generally cannot use MACRS for real
used. property (section 1250 property) in any of the following
situations.
Property You Placed in Service • You or someone related to you owned the property
in 1986.
Before 1987
• You lease the property to a person who owned the
You cannot use MACRS for property you placed in service property in 1986 (or someone related to that per-
before 1987 (except property you placed in service after son).
July 31, 1986, if MACRS was elected). Property placed in
service before 1987 must be depreciated under the meth-
• You acquired the property in a like-kind exchange,
involuntary conversion, or repossession of property
ods discussed in Publication 534.
you or someone related to you owned in 1986.
For a discussion of when property is placed in service,
MACRS applies only to that part of your basis in the
see When Does Depreciation Begin and End, earlier.
acquired property that represents cash paid or unlike
Use of real property changed. You generally must use property given up. It does not apply to the
MACRS to depreciate real property that you acquired for carried-over part of the basis.
personal use before 1987 and changed to business or
income-producing use after 1986. Exceptions. The rules above do not apply to the follow-
Improvements made after 1986. You must treat an im- ing.
provement made after 1986 to property you placed in
1. Residential rental property or nonresidential real
service before 1987 as separate depreciable property.
property.
Therefore, you can depreciate that improvement as sepa-
rate property under MACRS if it is the type of property that 2. Any property if, in the first tax year it is placed in
otherwise qualifies for MACRS depreciation. For more service, the deduction under the Accelerated Cost
information about improvements, see How Do You Treat Recovery System (ACRS) is more than the deduc-
Improvements, later in this chapter, and Additions and tion under MACRS using the half-year convention.

(For information on how to figure depreciation under A partnership acquiring property from a terminating
ACRS, see Publication 534.) partnership must determine whether it is related to the
terminating partnership immediately before the event
3. Property that was MACRS property in the hands of
causing the termination. For this rule, a terminating part-
the person from whom you acquired it because of (2)
nership is one that sells or exchanges, within 12 months,
above.
50% or more of its total interest in partnership capital or
profits.
Related persons. For this purpose, the following are re-
lated persons. Constructive ownership of stock or partnership
interest. To determine whether a person directly or indi-
1. An individual and a member of his or her family, rectly owns any of the outstanding stock of a corporation or
including only a spouse, child, parent, brother, sister, an interest in a partnership, apply the following rules.
half-brother, half-sister, ancestor, and lineal descen-
dant. 1. Stock or a partnership interest directly or indirectly
owned by or for a corporation, partnership, estate, or
2. A corporation and an individual who directly or indi- trust is considered owned proportionately by or for its
rectly owns more than 10% of the value of the out- shareholders, partners, or beneficiaries. However, for
standing stock of that corporation. a partnership interest owned by or for a C corpora-
3. Two corporations that are members of the same con- tion, this applies only to shareholders who directly or
trolled group. indirectly own 5% or more of the value of the stock of
the corporation.
4. A trust fiduciary and a corporation if more than 10%
2. An individual is considered to own the stock or part-
of the value of the outstanding stock is directly or
nership interest directly or indirectly owned by or for
indirectly owned by or for the trust or grantor of the
the individual’s family.
trust.
3. An individual who owns, except by applying rule (2),
5. The grantor and fiduciary, and the fiduciary and ben-
any stock in a corporation is considered to own the
eficiary, of any trust.
stock directly or indirectly owned by or for the
6. The fiduciaries of two different trusts, and the fiducia- individual’s partner.
ries and beneficiaries of two different trusts, if the
4. For purposes of rules (1), (2), or (3), stock or a
same person is the grantor of both trusts.
partnership interest considered to be owned by a
7. A tax-exempt educational or charitable organization person under rule (1) is treated as actually owned by
and any person (or, if that person is an individual, a that person. However, stock or a partnership interest
member of that person’s family) who directly or indi- considered to be owned by an individual under rule
rectly controls the organization. (2) or (3) is not treated as owned by that individual
for reapplying either rule (2) or (3) to make another
8. Two S corporations, and an S corporation and a
person considered to be the owner of the same stock
regular corporation, if the same persons own more
or partnership interest.
than 10% of the value of the outstanding stock of
each corporation.
9. A corporation and a partnership if the same persons Intangible Property
own both of the following.
Generally, if you can depreciate intangible property, you
a. More than 10% of the value of the outstanding usually use the straight line method of depreciation. How-
stock of the corporation. ever, you can choose to depreciate certain intangible prop-
erty under the income forecast method (discussed later).
b. More than 10% of the capital or profits interest in
the partnership. You cannot depreciate intangible property that is
10. The executor and beneficiary of any estate.

!
CAUTION
a section 197 intangible or that otherwise does
not meet all the requirements discussed earlier
under What Property Can Be Depreciated.
11. A partnership and a person who directly or indirectly
owns more than 10% of the capital or profits interest
in the partnership. Straight Line Method
12. Two partnerships, if the same persons directly or This method lets you deduct the same amount of deprecia-
indirectly own more than 10% of the capital or profits tion each year over the useful life of the property. To figure
interest in each. your deduction, first determine the adjusted basis, salvage
13. The related person and a person who is engaged in value, and estimated useful life of your property. Subtract
trades or businesses under common control. (See the salvage value, if any, from the adjusted basis. The
section 52(a) and 52(b) of the Internal Revenue balance is the total depreciation you can take over the
Code.) useful life of the property.
Divide the balance by the number of years in the useful
When to determine relationship. You must determine life. This gives you your yearly depreciation deduction.
whether you are related to another person at the time you Unless there is a big change in adjusted basis or useful life,
acquire the property. this amount will stay the same throughout the time you

depreciate the property. If, in the first year, you use the Income Forecast Method
property for less than a full year, you must prorate your
depreciation deduction for the number of months in use. You can choose to use the income forecast method in-
stead of the straight line method to depreciate the following
Example. In April, Frank bought a patent for $5,100 that depreciable intangibles.
is not a section 197 intangible. He depreciates the patent • Motion picture films or video tapes.
under the straight line method, using a 17-year useful life
and no salvage value. He divides the $5,100 basis by 17 • Sound recordings.
years to get his $300 yearly depreciation deduction. He • Copyrights.
only used the patent for 9 months during the first year, so
he multiplies $300 by 9/12 to get his deduction of $225 for • Books.
the first year. Next year, Frank can deduct $300 for the full • Patents.
year.
Under the income forecast method, each year’s depreci-
Patents and copyrights. If you can depreciate the cost of
ation deduction is equal to the cost, less salvage value, of
a patent or copyright, use the straight line method over the
the property, multiplied by a fraction. The numerator of the
useful life. The useful life of a patent or copyright is the
fraction is the current year’s net income from the property,
lesser of the life granted to it by the government or the
and the denominator is the total income anticipated from
remaining life when you acquire it. However, if the patent
the property through the end of the 10th taxable year
or copyright becomes valueless before the end of its useful
following the taxable year the property is placed in service.
life, you can deduct in that year any of its remaining cost or
For more information, see section 167(g) of the Internal
other basis.
Revenue Code.
Computer software. If you can depreciate the cost of Films, video tapes, and recordings. You cannot use
computer software, use the straight line method over a MACRS for motion picture films, video tapes, and sound
useful life of 36 months. recordings. For this purpose, sound recordings are discs,
Tax-exempt use property subject to a lease. The tapes, or other phonorecordings resulting from the fixation
useful life of computer software leased under a lease of a series of sounds. You can depreciate this property
agreement entered into after March 12, 2004, to a tax-ex- using either the straight line method or the income forecast
empt organization, governmental unit, or foreign person or method.
entity (other than a partnership), cannot be less than 125 Participations and residuals. You can include participa-
percent of the lease term. tions and residuals in the adjusted basis of the property for
purposes of computing your depreciation deduction under
Certain created intangibles. You can amortize certain
the income forecast method. The participations and
intangibles created after December 30, 2003, over a
residuals must relate to income to be derived from the
15-year period using the straight line method and no sal-
property before the end of the 10th taxable year after the
vage value, even though they have a limited useful life that
property is placed in service. For this purpose, participa-
cannot be estimated with reasonable accuracy. For exam-
tions and residuals are defined as costs which by contract
ple, amounts paid to acquire memberships or privileges of
vary with the amount of income earned in connection with
indefinite duration, such as a trade association member-
the property.
ship, are eligible costs.
Instead of including these amounts in the adjusted basis
The following are not eligible.
of the property, you can deduct the costs in the taxable
• Any intangible asset acquired from another person. year that they are paid.
• Created financial interests. Videocassettes. If you are in the business of renting
videocassettes, you can depreciate only those videocas-
• Any intangible asset that has a useful life that can be settes bought for rental. If the videocassette has a useful
estimated with reasonable accuracy.
life of one year or less, you can currently deduct the cost as
• Any intangible asset that has an amortization period a business expense.
or useful life that is specifically prescribed or prohib-
ited by the Code, regulations, or other published IRS Corporate or Partnership Property
guidance.
Acquired in a Nontaxable Transfer
• Any amount paid to facilitate an acquisition of a
trade or business, a change in the capital structure MACRS does not apply to property used before 1987 and
of a business entity, and certain other transactions. transferred after 1986 to a corporation or partnership (ex-
cept property the transferor placed in service after July 31,
You must also increase the 15-year safe harbor amorti- 1986, if MACRS was elected) to the extent its basis is
zation period to a 25-year period for certain intangibles carried over from the property’s adjusted basis in the
related to benefits arising from the provision, production, or transferor’s hands. You must continue to use the same
improvement of real property. For this purpose, real prop- depreciation method as the transferor and figure deprecia-
erty includes property that will remain attached to the real tion as if the transfer had not occurred. However, if
property for an indefinite period of time (such as roads, MACRS would otherwise apply, you can use it to depreci-
bridges, tunnels, pavements, pollution control facilities, ate the part of the property’s basis that exceeds the
etc.). carried-over basis.

The nontaxable transfers covered by this rule include Cost as Basis

the following.
The basis of property you buy is its cost plus amounts you
• A distribution in complete liquidation of a subsidiary. paid for items such as sales tax (see Exception, below),
• A transfer to a corporation controlled by the trans- freight charges, and installation and testing fees. The cost
feror. includes the amount you pay in cash, debt obligations,
other property, or services.
• An exchange of property solely for corporate stock
or securities in a reorganization. Exception. You can elect to deduct state and local
general sales taxes instead of state and local income taxes
• A contribution of property to a partnership in ex- as an itemized deduction on Schedule A (Form 1040). If
change for a partnership interest. you make that choice, you cannot include those sales
• A partnership distribution of property to a partner. 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
Election To Exclude Property property, your basis includes the amount you pay for the
From MACRS property plus the amount of the assumed debt.
If you can properly depreciate any property under a Example. You make a $20,000 down payment on prop-
method not based on a term of years, such as the erty and assume the seller’s mortgage of $120,000. Your
unit-of-production method, you can elect to exclude that total cost is $140,000, the cash you paid plus the mortgage
property from MACRS. You make the election by reporting you assumed.
your depreciation for the property on line 15 in Part II of
Form 4562 and attaching a statement as described in the Settlement costs. The basis of real property also in-
instructions for Form 4562. You must make this election by cludes certain fees and charges you pay in addition to the
the return due date (including extensions) for the tax year purchase price. These generally are shown on your settle-
you place your property in service. However, if you timely ment statement and include the following.
filed your return for the year without making the election, • Legal and recording fees.
you can still make the election by filing an amended return • Abstract fees.
within six months of the due date of the return (excluding
extensions). Attach the election to the amended return and • Survey charges.
write “Filed pursuant to section 301.9100-2” on the election • Owner’s title insurance.
statement. File the amended return at the same address
you filed the original return.
• 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
Use of standard mileage rate. If you use the standard commissions.
mileage rate to figure your tax deduction for your business
automobile, you are treated as having made an election to For fees and charges you cannot include in the basis of
exclude the automobile from MACRS. See Publication 463 property, see Real Property in Publication 551.
for a discussion of the standard mileage rate.
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
What Is the Basis of Your determine the basis of your property. For information about
the uniform capitalization rules, see Publication 551 and
Depreciable Property? the regulations under section 263A of the Internal Reve-
nue Code.
(see Glossary): Other Basis
Abstract fees Other basis usually refers to basis that is determined by
the way you received the property. For example, your
Adjusted basis basis is other than cost if you acquired the property in
Basis exchange for other property, as payment for services you
performed, as a gift, or as an inheritance. If you acquired
Exchange property in this or some other way, see Publication 551 to
Fair market value determine your basis.
Property changed from personal use. If you held prop-

To figure your depreciation deduction, you must determine erty for personal use and later use it in your business or
the basis of your property. To determine basis, you need to income-producing activity, your depreciable basis is the
know the cost or other basis of your property. lesser of the following.

For a discussion of adjustments to the basis of your prop-

1. The fair market value (FMV) of the property on the erty, see Adjusted Basis in Publication 551.
date of the change in use.
If you depreciate your property under MACRS, you also
2. Your original cost or other basis adjusted as follows. may have to reduce your basis by certain deductions and
credits with respect to the property. For more information,
a. Increased by the cost of any permanent improve-
see What Is the Basis For Depreciation in chapter 4.
ments or additions and other costs that must be
added to basis. Basis adjustment for depreciation allowed or
allowable. You must reduce the basis of property by the
b. Decreased by any deductions you claimed for
depreciation allowed or allowable, whichever is greater.
casualty and theft losses and other items that Depreciation allowed is depreciation you actually deducted
reduced your basis. (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
Example. Several years ago, Nia paid $160,000 to deduct, you must still reduce the basis of the property by
have her home built on a lot that cost her $25,000. Before the full amount of depreciation allowable.
changing the property to rental use last year, she paid If you deduct more depreciation than you should, you
$20,000 for permanent improvements to the house and must reduce your basis by any amount deducted from
claimed a $2,000 casualty loss deduction for damage to which you received a tax benefit (the depreciation al-
the house. Land is not depreciable, so she includes only lowed).
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
How Do You Treat
same date, her property had an FMV of $180,000, of which Improvements?
$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 Terms you may need to know
date of change ($165,000), because it is less than her (see Glossary):
adjusted basis ($178,000).
Improvement
Property acquired in a nontaxable transaction. Gener-
ally, 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 If you improve depreciable property, you must treat the
apply in determining the basis and figuring the MACRS improvement as separate depreciable property. For more
depreciation deduction and special depreciation allowance information, see Additions and Improvements under Which
for property acquired in a like-kind exchange or involuntary Recovery Period Applies in chapter 4.
conversion. See Like-kind exchanges and involuntary con- Repairs. You generally deduct the cost of repairing busi-
versions under How Much Can You Deduct in chapter 3 ness property in the same way as any other business
and Figuring the Deduction for Property Acquired in a expense. However, if a repair or replacement increases
Nontaxable Exchange under Figuring Depreciation Under the value of your property, makes it more useful, or length-
MACRS in chapter 4. ens its life, you must treat it as an improvement and
There are also special rules for determining the basis of depreciate it.
MACRS property involved in a like-kind exchange or invol-
untary conversion when the property is contained in a Example. You repair a small section on one corner of
general asset account. See How Do You Use General Aset the roof of a rental house. You deduct the cost of the repair
Accounts in chapter 4. as a rental expense. However, if you completely replace
the roof, the new roof is an improvement because it in-
creases the value and lengthens the life of the property.
Adjusted Basis You depreciate the cost of the new roof.
To find your property’s basis for depreciation, you may Improvements to rented property. You can depreciate
have to make certain adjustments (increases and de- permanent improvements you make to business property
creases) to the basis of the property for events occurring you rent from someone else.
between the time you acquired the property and the time
you placed it in service. These events could include the
following. Do You Have To File
• Installing utility lines.
Form 4562?
• Paying legal fees for perfecting the title.
• Settling zoning issues.
(see Glossary):
• Receiving rebates.
• Incurring a casualty or theft loss. Amortization

Listed property Filing an Amended Return

Placed in service
You can file an amended return to correct the amount of
Standard mileage rate depreciation claimed for any property in any of the follow-
ing situations.
You must complete and attach Form 4562 to your tax • You claimed the incorrect amount because of a
return for the current tax year if you are claiming any of the mathematical error made in any year.
following items. • You claimed the incorrect amount because of a post-
• A section 179 deduction for the current year or a ing error made in any year.
section 179 carryover from a prior year. See chapter • You have not adopted a method of accounting for
2 for information on the section 179 deduction. property placed in service by you in tax years ending
• Depreciation for property placed in service during after December 29, 2003.
the current year. • You claimed the incorrect amount on property
• Depreciation on any vehicle or other listed property, placed in service by you in tax years ending before
regardless of when it was placed in service. Listed December 30, 2003.
property is discussed in chapter 5.
• A deduction for any vehicle if the deduction is re- Adoption of accounting method defined. Generally,
ported on a form other than Schedule C (Form 1040) you adopt a method of accounting for depreciation by
or Schedule C-EZ (Form 1040). using a permissible method of determining depreciation
when you file your first tax return, or by using the same
• Amortization of costs if the current year is the first impermissible method of determining depreciation in two
year of the amortization period. or more consecutively filed tax returns. For an exception to
• Depreciation or amortization on any asset on a cor- this 2-year rule, see Revenue Procedure 2002-9 on page
porate income tax return (other than Form 1120S, 327 of Internal Revenue Bulletin 2002-3, available at
U.S. Income Tax Return for an S Corporation) re- www.irs.gov/pub/irs-irbs/irb02-03.pdf, as modified by Rev-
gardless of when it was placed in service. enue Procedure 2004-11 on page 311 of Internal Revenue
Bulletin 2004-3, available at www.irs.gov/pub/irs-irbs/
irb04-03.pdf.
You must submit a separate Form 4562 for each
!
CAUTION
business or activity on your return for which a
Form 4562 is required.
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
Table 1-1 presents an overview of the purpose of the for the year in which you did not deduct the correct
various parts of Form 4562. amount. A return filed before an unextended due
date is considered filed on that due date.
Employee. Do not use Form 4562 if you are an employee
and you deduct job-related vehicle expenses using either • 2 years from the time you paid your tax for that year.
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 stan- Changing Your Accounting Method
dard mileage rate and you are not reimbursed by your
employer for any expenses. 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
How Do You Correct change in your method of accounting for depreciation.
The following are examples of a change in method of
Depreciation Deductions? accounting for depreciation.
• A change in the treatment of an asset from nonde-
Terms you may need to know preciable to depreciable or vice versa.
(see Glossary):
• A change in the depreciation method, period of re-
covery, or convention of a depreciable asset.
Basis
• A change from not claiming to claiming the special
depreciation allowance if you did not make the elec-
tion to not claim any special allowance.
If you deducted an incorrect amount of depreciation in any
year, you may be able to make a correction by filing an • A change from claiming a 50% special depreciation
amended return for that year. See Filing an Amended allowance to claiming a 30% special depreciation
Return, next. If you are not allowed to make the correction allowance for qualified property (including property
on an amended return, you may be able to change your that is included in a class of property for which you
accounting method to claim the correct amount of depreci- elected a 30% special allowance instead of a 50%
ation. See Changing Your Accounting Method, later. special allowance).

Table 1-1. 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
Changes in depreciation that are not a change in method Additional guidance. For additional guidance and
of accounting (and may only be made on an amended special procedures for changing your accounting method,
return) include the following. automatic change procedures, amending your return, and
• An adjustment in the useful life of a depreciable filing Form 3115, see Revenue Procedure 2004-11, Reve-
asset for which depreciation is determined under nue Procedure 2005-43 on page 107 of Internal Revenue
section 167. Bulletin 2005-29, available at www.irs.gov/pub/irs-irbs/
irb05-29.pdf, and Revenue Procedure 2006-12 on page
• A change in use of an asset in the hands of the 310 of Internal Revenue Bulletin 2006-3, available at
same taxpayer.
www.irs.gov/pub/irs-irbs/irb06-03.pdf.
• Making a late depreciation election or revoking a
timely valid depreciation election (including the elec- Section 481(a) adjustment. If you file Form 3115 and
tion not to deduct the special depreciation allow-
change from an impermissible method to a permissible
ance). If you elected not to claim any special
allowance, a change from not claiming to claiming method of accounting for depreciation, you can make a
the special allowance is a revocation of the election section 481(a) adjustment for any unclaimed or excess
and is not an accounting method change. Also, if the amount of allowable depreciation. The adjustment is the
property is qualified property, a change from not difference between the total depreciation actually de-
claiming to claiming any special allowance is a late ducted for the property and the total amount allowable prior
election and is not an accounting method change. to the year of change. If no depreciation was deducted, the
• Any change in the placed-in-service date of a depre- adjustment is the total depreciation allowable prior to the
ciable asset. year of change. A negative section 481(a) adjustment
results in a decrease in taxable income. It is taken into
See section 1.446-1T(e)(2)(ii)(d) of the regulations for account in the year of change and is reported on your
more information and examples. business tax returns as “other expenses.” A positive sec-
tion 481(a) adjustment results in an increase in taxable
IRS approval. In some instances, you may be able to get income. It is generally taken into account over 4 tax years
approval from the IRS to change your method of account- and is reported on your business tax returns as “other
ing for depreciation under the automatic change request income.” However, you can elect to use a one-year adjust-
procedures generally covered in Revenue Procedure ment period and report the adjustment in the year of
2002-9. If you do not qualify to use the automatic proce- change if the total adjustment is less than $25,000. Make
dures to get approval, you must use the advance consent
the election by completing the appropriate line on Form
request procedures generally covered in Revenue Proce-
dure 97-27, 1997-1 C.B. 680. Also see the Instructions for 3115.
Form 3115 for more information on getting approval, in- If you file a Form 3115 and change from one permissible
cluding lists of scope limitations and automatic accounting method to another permissible method, the section 481(a)
method changes. adjustment is zero.

• It must be acquired for business use.

2. • It must have been acquired by purchase.
• It must not be property described later under What
Property Does Not Qualify.
Electing the Section
The following discussions provide information about
179 Deduction these requirements and exceptions.
Introduction Eligible Property

You can elect to recover all or part of the cost of certain To qualify for the section 179 deduction, your property
qualifying property, up to a limit, by deducting it in the year must be one of the following types of depreciable property.
you place the property in service. This is the section 179
1. Tangible personal property.
deduction. You can elect the section 179 deduction in-
stead of recovering the cost by taking depreciation deduc- 2. Other tangible property (except buildings and their
tions. structural components) used as:
Estates and trusts cannot elect the section 179 a. An integral part of manufacturing, production, or
!
CAUTION
deduction. extraction or of furnishing transportation, commu-
nications, electricity, gas, water, or sewage dispo-
sal services,
This chapter explains what property does and does not
qualify for the section 179 deduction, what limits apply to b. A research facility used in connection with any of
the deduction (including special rules for partnerships and the activities in (a) above, or
corporations), and how to elect it. It also explains when and c. A facility used in connection with any of the activi-
how to recapture the deduction. ties in (a) for the bulk storage of fungible com-
modities.
Useful Items
You may want to see: 3. Single purpose agricultural (livestock) or horticultural
structures. (See chapter 7 of Publication 225 for defi-
Publication nitions and information regarding the use require-
ments that apply to these structures.)
❏ 537 Installment Sales
4. Storage facilities (except buildings and their struc-
❏ 544 Sales and Other Dispositions of Assets tural components) used in connection with distribut-
❏ 954 Tax Incentives for Distressed Communities ing petroleum or any primary product of petroleum.
5. Off-the-shelf computer software.
Form (and Instructions)
❏ 4562 Depreciation and Amortization Tangible personal property. Tangible personal property
❏ 4797 Sales of Business Property is any tangible property that is not real property. It includes
the following property.
See chapter 6 for information about getting publications
and forms. • Machinery and equipment.
• Property contained in or attached to a building (other
than structural components), such as refrigerators,
What Property Qualifies? grocery store counters, office equipment, printing
presses, testing equipment, and signs.
• Gasoline storage tanks and pumps at retail service
(see Glossary): stations.
• Livestock, including horses, cattle, hogs, sheep,
Adjusted basis goats, and mink and other furbearing animals.
Basis
The treatment of property as tangible personal property
Class life for the section 179 deduction is not controlled by its treat-
Structural components ment under local law. For example, property may not be
tangible personal property for the deduction even if treated
Tangible property so under local law, and some property (such as fixtures)
may be tangible personal property for the deduction even if
To qualify for the section 179 deduction, your property treated as real property under local law.
must meet all the following requirements.
Off-the-shelf computer software. Off-the-shelf com-
• It must be eligible property. puter software placed in service during the tax year is
Chapter 2 Electing the Section 179 Deduction Page 15

qualifying property for purposes of the section 179 deduc- Example. Ken Larch is a tailor. He bought two industrial
tion. This is computer software that is readily available for sewing machines from his father. He placed both ma-
purchase by the general public, is subject to a nonexclu- chines in service in the same year he bought them. They
sive license, and has not been substantially modified. It do not qualify as section 179 property because Ken and his
includes any program designed to cause a computer to father are related persons. He cannot claim a section 179
perform a desired function. However, a database or similar deduction for the cost of these machines.
item is not considered computer software unless it is in the
public domain and is incidental to the operation of other-
wise qualifying software. What Property Does Not
Property Acquired for Business Use Qualify?
To qualify for the section 179 deduction, your property Terms you may need to know
must have been acquired for use in your trade or business. (see Glossary):
Property you acquire only for the production of income,
such as investment property, rental property (if renting Basis
property is not your trade or business), and property that
produces royalties, does not qualify. Class life
Partial business use. When you use property for both Certain property does not qualify for the section 179 de-
business and nonbusiness purposes, you can elect the duction. This includes the following.
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 Land and Improvements
the cost of the property by the percentage of business use. Land and land improvements, such as buildings and other
Use the resulting business cost to figure your section 179 permanent structures and their components, are real prop-
deduction. erty, not personal property and do not qualify as section
179 property. Land improvements include swimming
Example. May Oak bought and placed in service an pools, paved parking areas, wharves, docks, bridges, and
item of section 179 property costing $11,000. She used the fences.
property 80% for her business and 20% for personal pur-
poses. The business part of the cost of the property is
$8,800 (80% × $11,000). Excepted Property
Even if the requirements explained earlier under What
Property Acquired by Purchase Property Qualifies are met, you cannot elect the section
179 deduction for the following property.
To qualify for the section 179 deduction, your property
must have been acquired by purchase. For example, prop- • Certain property you lease to others (if you are a
erty acquired by gift or inheritance does not qualify. noncorporate lessor).
Property is not considered acquired by purchase in the • Certain property used predominantly to furnish lodg-
following situations. ing or in connection with the furnishing of lodging.
1. It is acquired by one member of a controlled group • Air conditioning or heating units.
from another member of the same group. • Property used predominantly outside the United
2. Its basis is determined either — States (except property described in section
168(g)(4) of the Internal Revenue Code).
a. In whole or in part by its adjusted basis in the
• Property used by certain tax-exempt organizations
hands of the person from whom it was acquired, (except property used in connection with the produc-
or tion of income subject to the tax on unrelated trade
b. Under the stepped-up basis rules for property ac- or business income).
quired from a decedent. • Property used by governmental units or foreign per-
sons or entities (except property used under a lease
3. It is acquired from a related person. with a term of less than 6 months).
Related persons. Related persons are described under Leased property. Generally, you cannot claim a section
Related persons in chapter 1 in the discussion on property 179 deduction based on the cost of property you lease to
owned or used in 1986 under Can You Use MACRS To someone else. (This rule does not apply to corporations.)
Depreciate Your Property. However, to determine whether However, you can claim a section 179 deduction for the
property qualifies for the section 179 deduction, treat as an cost of the following property.
individual’s family only his or her spouse, ancestors, and
lineal descendants and substitute ‘‘50%’’ for ‘‘10%’’ each 1. Property you manufacture or produce and lease to
place it appears. others.
Page 16 Chapter 2 Electing the Section 179 Deduction

2. Property you purchase and lease to others if both the Internal Revenue Code (as in effect on November 4,
following tests are met. 1990).
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-
How Much Can You Deduct?
ferred to the lessee, the total business deductions
you are allowed on the property (other than rents Terms you may need to know
and reimbursed amounts) are more than 15% of (see Glossary):
the rental income from the property.
Adjusted basis
Basis
Property used for lodging. Generally, you cannot claim
a section 179 deduction for property used predominantly to Placed in service
furnish lodging or in connection with the furnishing of
lodging. However, this does not apply to the following
types of property. Your section 179 deduction is generally the cost of the
qualifying property. However, the total amount you can
• Nonlodging commercial facilities that are available to elect to deduct under section 179 is subject to a dollar limit
those not using the lodging facilities on the same and a business income limit. These limits apply to each
basis as they are available to those using the lodg- taxpayer, not to each business. However, see Married
ing facilities. Individuals under Dollar Limits, later. Also, see the special
• Property used by a hotel or motel in connection with rules for applying the limits for partnerships and S corpora-
the trade or business of furnishing lodging where the tions later under Partnerships and Partners and under S
predominant portion of the accommodations is used Corporations. For a passenger automobile placed in serv-
by transients. ice in 2005, the total section 179 and depreciation deduc-
tion is limited. See Do the Passenger Automobile Limits
• Any certified historic structure to the extent its basis
is due to qualified rehabilitation expenditures. Apply in chapter 5.
If you deduct only part of the cost of qualifying property
• Any energy property. as a section 179 deduction, you can generally depreciate
the cost you do not deduct. See Claiming the Special
Energy property. Energy property is property that
Depreciation Allowance and Figuring Depreciation Under
meets the following requirements.
MACRS, later.
1. It is one of the following types of property.
Trade-in of other property. If you buy qualifying property
a. Equipment that uses solar energy to generate with cash and a trade-in, its cost for purposes of the section
electricity, to heat or cool a structure, to provide 179 deduction includes only the cash you paid.
hot water for use in a structure, or to provide solar
process heat. Example. Silver Leaf, a retail bakery, traded two ovens
b. Equipment acquired after December 31, 2005, having a total adjusted basis of $680 for a new oven
that uses solar energy to illuminate the inside of a costing $1,320. They received an $800 trade-in allowance
structure using fiberoptic distributed sunlight. for the old ovens and paid $520 in cash for the new oven.
c. Equipment used to produce, distribute, or use en- The bakery also traded a used van with an adjusted basis
ergy derived from a geothermal deposit. For elec- of $4,500 for a new van costing $9,000. They received a
tricity generated by geothermal power, this $4,800 trade-in allowance on the used van and paid
includes equipment up to (but not including) the $4,200 in cash for the new van.
electrical transmission stage. Only the portion of the new property’s basis paid by
d. Qualified fuel cell property or qualified cash qualifies for the section 179 deduction. Therefore,
microturbine property acquired after December Silver Leaf’s qualifying costs for the section 179 deduction
31, 2005. are $4,720 ($520 + $4,200).
2. The construction, reconstruction, or erection of the Dollar Limits

property must be completed by you.
The total amount you can elect to deduct under section
3. For property you acquire, the original use of the
property must begin with you. 179 for most property placed in service in 2005 generally
cannot be more than $105,000 ($108,000 in 2006). If you
4. The property must meet the performance and quality acquire and place in service more than one item of qualify-
standards, if any, prescribed by Income Tax Regula- ing property during the year, you can allocate the section
tions in effect at the time you get the property. 179 deduction among the items in any way, as long as the
Energy property does not include any property that is total deduction is not more than $105,000. You do not have
public utility property as defined by section 46(f)(5) of the to claim the full $105,000.

The amount you can elect to deduct is not af- • Property that would be qualified Liberty Zone prop-
TIP fected if you place qualifying property in service erty except for the fact that it is eligible for the spe-
in a short tax year or if you place qualifying cial depreciation allowance.
property in service for only a part of a 12-month tax year.
See Qualified Liberty Zone Property in chapter 3 for an
After you apply the dollar limit to determine a explanation of qualified Liberty Zone property. See What Is
!
CAUTION
tentative deduction, you must apply the business
income limit (described later) to determine your
Qualified Property in chapter 3 for an explanation of prop-
erty eligible for the special depreciation allowance.
actual section 179 deduction.
You take into account only 50% (instead of 100%) of the
cost of qualified Liberty Zone property placed in service in
Example. In 2005, you bought and placed in service a
a year when figuring the reduced dollar limit for costs
$108,000 tractor and a $2,000 circular saw for your busi-
exceeding $420,000 (explained earlier).
ness. You elect to deduct $103,000 for the tractor and the
entire $2,000 for the saw, a total of $105,000. This is the Increased dollar limit. The dollar limit on the section 179
maximum amount you can deduct. Your $2,000 deduction deduction is increased by the smaller of:
for the saw completely recovered its cost. Your basis for
depreciation is zero. The basis for depreciation of your • $35,000, or
tractor is $5,000. You figure this by subtracting your • The cost of section 179 property that is qualified
$103,000 section 179 deduction for the tractor from the Liberty Zone property placed in service during the
$108,000 cost of the tractor. year (including such property placed in service by
your spouse, even if you are filing a separate return).
Reduced dollar limit for cost exceeding $420,000. If
the cost of your qualifying section 179 property placed in
service in a year is more than $420,000 ($430,000 in Enterprise Zone and Renewal Community
2006), you generally must reduce the dollar limit (but not Businesses
below zero) by the amount of cost over $420,000. If the
cost of your section 179 property placed in service during An increased section 179 deduction is available to enter-
2005 is $525,000 ($535,000 in 2006) or more, you cannot prise zone businesses and renewal community busi-
take a section 179 deduction. nesses for qualified zone property or qualified renewal
property placed in service in an empowerment zone or
Example. In 2005, Jane Ash placed in service machin- renewal community. For definitions of “enterprise zone
ery costing $495,000. This cost is $75,000 more than business,” “renewal community business,” “qualified zone
$420,000, so she must reduce her dollar limit to $30,000 property,” and “qualified renewal property,” see Publication
($105,000 − $75,000). 954, Tax Incentives for Distressed Communities.
Situations affecting dollar limit. Under certain circum- Increased dollar limit. The dollar limit on the section 179
stances, the general dollar limits on the section 179 deduc- deduction is increased if your business qualifies as an
tion may be reduced or increased or there may be an enterprise zone business or a renewal community busi-
additional dollar limit. The general dollar limit is affected by ness. The increase is the smaller of:
any of the following situations.
• $35,000, or
• You placed qualified property in service in the New
York Liberty Zone. • The cost of section 179 property that is also qualified
zone property or qualified renewal property (includ-
• Your business is an enterprise zone business or a ing such property placed in service by your spouse,
renewal community business. even if you are filing a separate return).
• You placed qualified property in service in the Gulf
Opportunity Zone. Reduced dollar limit. You take into account only 50%
• You placed in service a sport utility vehicle. (instead of 100%) of the cost of qualified zone property
placed in service in a year when figuring the reduced dollar
limit for costs exceeding $420,000 (explained earlier).
Liberty Zone Property For purposes of this increased section 179 de-
An increased section 179 deduction is available for quali- !
CAUTION
duction, do not treat qualified section 179 Gulf
Opportunity Zone property (defined next under
fied Liberty Zone property (defined next) you place in
service in the New York Liberty Zone (Liberty Zone). The Gulf Opportunity (GO) Zone Property) as qualified zone
Liberty Zone is the area located on or south of Canal property (or qualified renewal property) unless you elect
Street, East Broadway (east of its intersection with Canal not to treat the property as section 179 GO Zone property.
Street), or Grand Street (east of its intersection with East
Broadway) in the Borough of Manhattan in the City of New Gulf Opportunity Zone (GO Zone) Property
York, New York.
An increased section 179 deduction is available for quali-
Qualified Liberty Zone property. To qualify for this in-
fied section 179 GO Zone property (defined next) you
creased section 179 deduction, you must acquire section
place in service in the GO Zone. The GO Zone is that
179 property that is either:
portion of the Hurricane Katrina disaster area that is deter-
• Qualified Liberty Zone property, or mined by the Federal Emergency Management Agency

(FEMA) to warrant individual only or both individual and including the reduction for costs over $420,000. You must
public assistance from the federal government. See Publi- allocate the dollar limit (after any reduction) between you
cation 4492, Information for Taxpayers Affected by Hurri- equally, unless you both elect a different allocation. If the
canes Katrina, Rita, and Wilma, for a list of the areas percentages elected by each of you do not total 100%,
affected. 50% will be allocated to each of you.
Qualified section 179 GO Zone property. Qualified sec- Example. Jack Elm is married. He and his wife file
tion 179 GO Zone property is section 179 property (de- separate returns. Jack bought and placed in service
scribed earlier) acquired after August 27, 2005, that is also $420,000 of qualified farm machinery in 2005. His wife has
qualified GO Zone property. See Qualified Gulf Opportu- her own business, and she bought and placed in service
nity Zone Property in chapter 3 for a description of qualified $10,000 of qualified business equipment. Their combined
GO Zone property. dollar limit is $95,000. This is because they must figure the
Increased dollar limits. The limit on the section 179 limit as if they were one taxpayer. They reduce the
deduction is increased by the smaller of: $105,000 dollar limit by the $10,000 excess of their costs
over $420,000.
• $100,000, or They elect to allocate the $95,000 dollar limit as follows.
• The cost of qualified section 179 GO Zone property
placed in service during the year (including such • $90,250 ($95,000 x 95%) to Mr. Elm’s machinery.
property placed in service by your spouse, even if • $4,750 ($95,000 x 5%) to Mrs. Elm’s equipment.
you are filing a separate return).
If they did not make an election to allocate their costs in this
way, they would have to allocate $47,500 ($95,000 × 50%)
The amount for which you can make the election is
to each of them.
reduced if the cost of all section 179 property placed in
service during the year exceeds $420,000 increased by
Joint return after filing separate returns. If you and
the smaller of:
your spouse elect to amend your separate returns by filing
• $600,000, or a joint return after the due date for filing your return, the
• The cost of qualified section 179 GO Zone property dollar limit on the joint return is the lesser of the following
placed in service during the year. amounts.
. • The dollar limit (after reduction for any cost of sec-

tion 179 property over $420,000).
Sport Utility and Certain Other Vehicles • The total cost of section 179 property you and your
spouse elected to expense on your separate returns.
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 in 2005. This rule applies to any Example. The facts are the same as in the previous
4-wheeled vehicle primarily designed or used to carry example except that Jack elected to deduct $30,000 of the
passengers over public streets, roads, or highways, that is cost of section 179 property on his separate return and his
rated at more than 6,000 pounds gross vehicle weight and wife elected to deduct $2,000. After the due date of their
not more than 14,000 pounds gross vehicle weight. How- returns, they file a joint return. Their dollar limit for the
ever, the $25,000 limit does not apply to any vehicle: section 179 deduction is $32,000. This is the lesser of the
following amounts.
• Designed to seat more than nine passengers behind
the driver’s seat, • $95,000 —The dollar limit less the cost of section
179 property over $420,000.
• Equipped with a cargo area (either open or enclosed
by a cap) of at least six feet in interior length that is • $32,000 —The total they elected to expense on their
not readily accessible from the passenger compart- separate returns.
ment, or
• That has an integral enclosure fully enclosing the
driver compartment and load carrying device, does Business Income Limit
not have seating rearward of the driver’s seat, and
The total cost you can deduct each year after you apply the
has no body section protruding more than 30 inches
dollar limit is limited to the taxable income from the active
ahead of the leading edge of the windshield.
conduct of any trade or business during the year. Gener-
ally, you are considered to actively conduct a trade or
Married Individuals business if you meaningfully participate in the manage-
ment or operations of the trade or business.
If you are married, how you figure your section 179 deduc- Any cost not deductible in one year under section 179
tion depends on whether you file jointly or separately. If because of this limit can be carried to the next year. See
you file a joint return, you and your spouse are treated as Carryover of disallowed deduction, later.
one taxpayer in determining any reduction to the dollar
limit, regardless of which of you purchased the property or Taxable income. In general, figure taxable income for
placed it in service. If you and your spouse file separate this purpose by totaling the net income and losses from all
returns, you are treated as one taxpayer for the dollar limit, trades and businesses you actively conducted during the

year. Net income or loss from a trade or business includes for charitable contributions is $125,000. XYZ figures its
the following items. section 179 deduction and its deduction for charitable
contributions as follows.
• Section 1231 gains (or losses).
• Interest from working capital of your trade or busi- Step 1 – Taxable income figured without either deduction
ness. is $125,000.
• Wages, salaries, tips, or other pay earned as an Step 2 – Using $125,000 as taxable income, XYZ’s hypo-
employee. thetical section 179 deduction is $105,000.
For information about section 1231 gains and losses, see Step 3 – $20,000 ($125,000 − $105,000).
chapter 3 in Publication 544. Step 4 – Using $20,000 (from Step 3) as taxable income,
In addition, figure taxable income without regard to any XYZ’s hypothetical charitable contribution (limited to 10%
of the following. of taxable income) is $2,000.
Step 5 – $123,000 ($125,000 − $2,000).
• The section 179 deduction.
Step 6 – Using $123,000 (from Step 5) as taxable in-
• The self-employment tax deduction. come, XYZ figures the actual section 179 deduction. Be-
• Any net operating loss carryback or carryforward. cause the taxable income is at least $105,000, XYZ can
take a $105,000 section 179 deduction.
• Any unreimbursed employee business expenses.
Step 7 – $20,000 ($125,000 − $105,000).
Two different taxable income limits. In addition to the Step 8 – Using $20,000 (from Step 7) as taxable income,
business income limit for your section 179 deduction, you XYZ’s actual charitable contribution (limited to 10% of
may have a taxable income limit for some other deduction. taxable income) is $2,000.
You may have to figure the limit for this other deduction
taking into account the section 179 deduction. If so, com-
Carryover of disallowed deduction. You can carry over
plete the following steps.
for an unlimited number of years the cost of any section
Step Action 179 property you elected to expense but were unable to
because of the business income limit. This disallowed
1 Figure taxable income without the section 179 deduction amount is shown on line 13 of Form 4562. You
deduction or the other deduction. use the amount you carry over to determine your section
2 Figure a hypothetical section 179 deduction 179 deduction in the next year. Enter that amount on line
using the taxable income figured in Step 1. 10 of your Form 4562 for the next year.
If you place more than one property in service in a year,
3 Subtract the hypothetical section 179 deduction you can select the properties for which all or a part of the
figured in Step 2 from the taxable income figured costs will be carried forward. Your selections must be
in Step 1. shown in your books and records. For this purpose, treat
4 Figure a hypothetical amount for the other section 179 costs allocated from a partnership or an S
deduction using the amount figured in Step 3 as corporation as one item of section 179 property. If you do
taxable income. not make a selection, the total carryover will be allocated
equally among the properties you elected to expense for
5 Subtract the hypothetical other deduction figured
in Step 4 from the taxable income figured in Step the year.
1. If costs from more than one year are carried forward to a
subsequent year in which only part of the total carryover
6 Figure your actual section 179 deduction using can be deducted, you must deduct the costs being carried
the taxable income figured in Step 5. forward from the earliest year first.
7 Subtract your actual section 179 deduction If there is a sale or other disposition of your
figured in Step 6 from the taxable income figured TIP property (including a transfer at death) before
in Step 1. you can use the full amount of any outstanding
8 Figure your actual other deduction using the carryover of your disallowed section 179 deduction,
taxable income figured in Step 7. neither you nor the new owner can deduct any of the
unused amount. Instead, you must add it back to the
property’s basis.
Example. On February 1, 2005, the XYZ corporation
purchased and placed in service qualifying section 179 Partnerships and Partners
property that cost $105,000. It elects to expense the entire
$105,000 cost under section 179. In June, the corporation The section 179 deduction limits apply both to the partner-
gave a charitable contribution of $10,000. A corporation’s ship and to each partner. The partnership determines its
limit on charitable contributions is figured after subtracting section 179 deduction subject to the limits. It then allocates
any section 179 deduction. The business income limit for the deduction among its partners.
the section 179 deduction is figured after subtracting any Each partner adds the amount allocated from partner-
allowable charitable contributions. XYZ’s taxable income ships (shown on Schedule K-1 (Form 1065), Partner’s
figured without the section 179 deduction or the deduction Share of Income, Deductions, Credits, etc.) to his or her

nonpartnership section 179 costs and then applies the Different tax years. For purposes of the business in-
dollar limit to this total. To determine any reduction in the come limit, if the partner’s tax year and that of the partner-
dollar limit for costs over $420,000, the partner does not ship differ, the partner’s share of the partnership’s taxable
include any of the cost of section 179 property placed in income for a tax year is generally the partner’s distributive
service by the partnership. After the dollar limit (reduced share for the partnership tax year that ends with or within
for any nonpartnership section 179 costs over $420,000) is the partner’s tax year.
applied, any remaining cost of the partnership and non-
partnership section 179 property is subject to the business Example. John and James Oak are equal partners in
income limit. Oak Company. Oak Company uses a tax year ending
January 31. John and James both use a tax year ending
Partnership’s taxable income. For purposes of the busi- December 31. For its tax year ending January 31, 2005,
ness income limit, figure the partnership’s taxable income Oak Company’s taxable income from the active conduct of
by adding together the net income and losses from all its business is $80,000, of which $70,000 was earned
trades or businesses actively conducted by the partnership during 2004. John and James each include $40,000 (each
during the year. See Publication 541, Partnerships, for partner’s entire share) of partnership taxable income in
information on how to figure partnership net income (or computing their business income limit for the 2005 tax
loss). However, figure taxable income without regard to year.
credits, tax-exempt income, the section 179 deduction,
and guaranteed payments under section 707(c) of the Adjustment of partner’s basis in partnership. A partner
Internal Revenue Code. must reduce the basis of his or her partnership interest by
the total amount of section 179 expenses allocated from
Partner’s share of partnership’s taxable income. For the partnership even if the partner cannot currently deduct
purposes of the business income limit, the taxable income the total amount. If the partner disposes of his or her
of a partner engaged in the active conduct of one or more partnership interest, the partner’s basis for determining
of a partnership’s trades or businesses includes his or her gain or loss is increased by any outstanding carryover of
allocable share of taxable income derived from the disallowed section 179 expenses allocated from the part-
partnership’s active conduct of any trade or business. nership.
Example. In 2005, Beech Partnership placed in service Adjustment of partnership’s basis in section 179 prop-
section 179 property with a total cost of $445,000. The erty. The basis of a partnership’s section 179 property
partnership must reduce its dollar limit by $25,000 must be reduced by the section 179 deduction elected by
($445,000 − $420,000). Its maximum section 179 deduc- the partnership. This reduction of basis must be made
tion is $80,000 ($105,000 − $25,000), and it elects to even if a partner cannot deduct all or part of the section 179
expense that amount. The partnership’s taxable income deduction allocated to that partner by the partnership be-
from the active conduct of all its trades or businesses for cause of the limits.
the year was $100,000, so it can deduct the full $80,000. It
allocates $40,000 of its section 179 deduction and $50,000
of its taxable income to Dean, one of its partners. S Corporations
In addition to being a partner in Beech Partnership,
Generally, the rules that apply to a partnership and its
Dean is also a partner in the Cedar Partnership, which
partners also apply to an S corporation and its sharehold-
allocated to him a $30,000 section 179 deduction and
ers. The deduction limits apply to an S corporation and to
$35,000 of its taxable income from the active conduct of its
business. He also conducts a business as a sole proprietor each shareholder. The S corporation allocates its deduc-
and, in 2005, placed in service in that business qualifying tion to the shareholders who then take their section 179
section 179 property costing $55,000. He had a net loss of deduction subject to the limits.
$5,000 from that business for the year.
Figuring taxable income for an S corporation. To fig-
Dean does not have to include section 179 partnership
costs to figure any reduction in his dollar limit, so his total ure taxable income (or loss) from the active conduct by an
section 179 costs for the year are not more than $420,000 S corporation of any trade or business, you total the net
and his dollar limit is not reduced. His maximum section income and losses from all trades or businesses actively
179 deduction is $105,000. He elects to expense all of the conducted by the S corporation during the year.
$70,000 in section 179 deductions allocated from the part- To figure the net income (or loss) from a trade or
nerships ($40,000 from Beech Partnership plus $30,000 business actively conducted by an S corporation, you take
from Cedar Partnership), plus $35,000 of his sole into account the items from that trade or business that are
proprietorship’s section 179 costs, and notes that informa- passed through to the shareholders and used in determin-
tion in his books and records. However, his deduction is ing each shareholder’s tax liability. However, you do not
limited to his business taxable income of $80,000 ($50,000 take into account any credits, tax-exempt income, the
from Beech Partnership, plus $35,000 from Cedar Partner- section 179 deduction, and deductions for compensation
ship minus $5,000 loss from his sole proprietorship). He paid to shareholder-employees. For purposes of determin-
carries over $25,000 ($105,000 − $80,000) of the elected ing the total amount of S corporation items, treat deduc-
section 179 costs to 2006. He allocates the carryover tions and losses as negative income. In figuring the taxable
amount to the cost of section 179 property placed in serv- income of an S corporation, disregard any limits on the
ice in his sole proprietorship, and notes that allocation in amount of an S corporation item that must be taken into
his books and records. account when figuring a shareholder’s taxable income.

Other Corporations
When Must You Recapture the
A corporation’s taxable income from its active conduct of
any trade or business is its taxable income figured with the Deduction?
following changes.
1. It is figured before deducting the section 179 deduc- (see Glossary):
tion, any net operating loss deduction, and special
deductions (as reported on the corporation’s income Disposition
tax return).
Exchange
2. It is adjusted for items of income or deduction in-
Recapture
cluded in the amount figured in 1, above, not derived
from a trade or business actively conducted by the Recovery period
corporation during the tax year. Section 1245 property
You may have to recapture the section 179 deduction if, in

How Do You Elect the any year during the property’s recovery period, the per-
centage of business use drops to 50% or less. In the year
Deduction? the business use drops to 50% or less, you include the
recapture amount as ordinary income in Part IV of Form
Terms you may need to know 4797. You also increase the basis of the property by the
(see Glossary): recapture amount. Recovery periods for property are dis-
cussed under Which Recovery Period Applies in chapter 4.
Listed property If you sell, exchange, or otherwise dispose of
Placed in service !
CAUTION
the property, do not figure the recapture amount
under the rules explained in this discussion. In-
stead, use the rules for recapturing depreciation explained
You elect to take the section 179 deduction by completing in chapter 3 of Publication 544 under Section 1245 Prop-
Part I of Form 4562. erty.
If you elect the deduction for listed property (de- If the property is listed property (described in
! scribed in chapter 5), complete Part V of Form !
CAUTION
chapter 5), do not figure the recapture amount
under the rules explained in this discussion
CAUTION 4562 before completing Part I.
when the percentage of business use drops to 50% or less.
Instead, use the rules for recapturing excess depreciation
For property placed in service in 2005, file Form 4562 in chapter 5 under What Is the Business-Use Requirement.
with either of the following.
Figuring the recapture amount. To figure the amount to
• Your original 2005 tax return (whether or not you file recapture, take the following steps.
it timely).
• An amended return for 2005 filed within the time 1. Figure the depreciation that would have been allowa-
prescribed by law. An election made on an amended ble on the section 179 deduction you claimed. Begin
with the year you placed the property in service and
return must specify the item of section 179 property
include the year of recapture.
to which the election applies and the part of the cost
of each such item to be taken into account. The 2. Subtract the depreciation figured in (1) from the sec-
amended return must also include any resulting ad- tion 179 deduction you claimed. The result is the
justments to taxable income. amount you must recapture.
You must keep records that show the specific Example. In January 2003, Paul Lamb, a calendar year
identification of each piece of qualifying section taxpayer, bought and placed in service section 179 prop-
RECORDS 179 property. These records must show how you erty costing $10,000. The property is not listed property.
acquired the property, the person you acquired it from, and He elected a $5,000 section 179 deduction for the property
when you placed it in service. and also elected not to claim a special depreciation allow-
ance. He used the property only for business in 2003 and
2004. In 2005, he used the property 40% for business and
Revoking an election. An election (or any specification 60% for personal use. He figures his recapture amount as
made in the election) to take a section 179 deduction for follows.
2005, can be revoked without IRS approval by filing an
amended return. The amended return must be filed within Section 179 deduction claimed (2003) . . . . . . . . . $5,000.00
the time prescribed by law. The amended return must also Minus: Allowable depreciation
include any resulting adjustments to taxable income. Once (instead of section 179 deduction):
made, the revocation is irrevocable. 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . $1,666.50

2004 . . . . . . . . . . . . . . . . . . . . . . . . . . 2,222.50
2005 ($740.50 × 40% (business)) . . . . . 296.20 4,185.20
2005 — Recapture amount . . . . . . . . . . . . . . . . $ 814.80
What Is Qualified Property?
Paul must include $814.80 in income for 2005. Terms you may need to know
(see Glossary):
Qualified zone property and qualified renewal prop-
erty. If any qualified zone property or qualified renewal
Business/investment use
property placed in service during the year ceases to be
used in an empowerment zone or renewal community by Improvement
an enterprise zone business or a renewal community busi-
Nonresidential real property
ness in a later year, the benefit of the increased section
179 deduction must be reported as other income on your Placed in service
return. Residential rental property
Qualified Liberty Zone property. If any qualified Liberty Structural components
Zone property placed in service during the year ceases to
be used in the Liberty Zone in a later year, the benefit of the
increased section 179 deduction must be reported as other Your property is qualified property if it is one of the follow-
income on your return. ing.
Qualified section 179 GO Zone property. If any quali- • Certain property with a long production period.
fied section 179 GO Zone property ceases to be qualified • Certain noncommercial aircraft.
section 179 GO Zone property in a later year, the benefit of
the increased section 179 deduction must be reported as • Qualified Liberty Zone property.
other income on your return. • Qualified Gulf Opportunity Zone (GO Zone) property.
.
The following discussions provide information about the
types of qualified property listed above for which you can
3. take the special depreciation allowance.
Long Production Period Property

Claiming the Special To be qualified property, long production period property
Depreciation must meet the following requirements.
Allowance 1. It is new property of one of the following types.

a. Tangible property depreciated under the modified
accelerated cost recovery system (MACRS) with
Introduction a recovery period of 20 years or less. Generally,
You can take a special depreciation allowance to recover every type of property except real property has a
part of the cost of qualified property (defined next), placed recovery period of 20 years or less.
in service during the tax year. The allowance applies only b. Water utility property (25-year property described
for the first year you place the property in service. For under Which Property Class Applies under GDS
qualified property placed in service in 2005, you can take in chapter 4).
an additional 50% (or 30%, if applicable) special allow-
ance. The allowance is an additional deduction you can c. Computer software that is readily available for
take after any section 179 deduction and before you figure purchase by the general public, is subject to a
regular depreciation under MACRS for the year you place nonexclusive license, and has not been substan-
the property in service. tially modified. (The cost of some computer
This chapter explains what is qualified property. It also software is treated as part of the cost of hardware
includes rules regarding how to figure an allowance, how and is depreciated under MACRS.)
to elect not to claim an allowance, and when you must d. Qualified leasehold improvement property (de-
recapture an allowance. fined next).
Useful Items 2. The property has a recovery period of at least 10

You may want to see: years or is transportation property. Transportation
property is tangible personal property used in the
Form (and Instructions) trade or business of transporting persons or property.
❏ 4562 Depreciation and Amortization 3. The property is subject to section 263A.
See chapter 6 for information about getting publications 4. The property has an estimated production period ex-
and forms. ceeding 2 years or has an estimated production pe-
Chapter 3 Claiming the Special Depreciation Allowance Page 23

riod exceeding 1 year and an estimated production 7. The fiduciaries of two different trusts, and the fiducia-
cost exceeding $1,000,000. ries and beneficiaries of two different trusts, if the
same person is the grantor of both trusts.
5. The property meets all of the tests discussed under
Other Tests To Be Met, later. 8. A tax-exempt educational or charitable organization
and any person (or, if that person is an individual, a
6. The property is not excepted property, discussed on
member of that person’s family) who directly or indi-
page 25 under Excepted Property.
rectly controls the organization.
9. Two S corporations, and an S corporation and a
Qualified leasehold improvement property. Generally, regular corporation, if the same persons own 80% or
this is any improvement to an interior part of a building that more of the value of the outstanding stock of each
is nonresidential real property, if all the following require- corporation.
ments are met.
10. A corporation and a partnership if the same persons
• The improvement is made under or according to a own both of the following.
lease by the lessee (or any sublessee) or the lessor
a. 80% or more of the value of the outstanding stock
of that part of the building.
of the corporation.
• That part of the building is to be occupied exclusively b. 80% or more of the capital or profits interest in the
by the lessee (or any sublessee) of that part.
partnership.
• The improvement is placed in service more than 3
years after the date the building was first placed in 11. The executor and beneficiary of any estate.
service by any person.
• The improvement is section 1250 property. See Noncommercial Aircraft
chapter 3 in Publication 544, Sales and Other Dispo-
sitions of Assets, for the definition of section 1250 To be qualified property, noncommercial aircraft must
property. meet the following requirements.
However, a qualified leasehold improvement does not • The aircraft must not be tangible personal property
include any improvement for which the expenditure is used in the trade or business of transporting persons
attributable to any of the following. or property (except for agricultural or firefighting pur-
poses).
• The enlargement of the building.
• The aircraft must be purchased (as discussed under
• Any elevator or escalator. Property Acquired by Purchase in chapter 2) by a
• Any structural component benefiting a common purchaser who at the time of the contract for
area. purchase, makes a nonrefundable deposit of the
lesser of 10% of the cost or $100,000.
• The internal structural framework of the building.
• The aircraft must have an estimated production pe-
Generally, a binding commitment to enter into a lease is riod exceeding four months and a cost exceeding
treated as a lease and the parties to the commitment are $200,000.
treated as the lessor and lessee. However, a lease be- • The aircraft must meet all of the tests discussed next
tween related persons is not treated as a lease. under Other Tests To Be Met.
Related persons. For this purpose, the following are • The aircraft must not be excepted property, dis-
related persons. cussed on page 25 under Excepted Property.
1. Members of an affiliated group.
2. An individual and a member of his or her family, Other Tests To Be Met
including only a spouse, child, parent, brother, sister,
half-brother, half-sister, ancestor, and lineal descen- Qualified long production period property and noncommer-
dant. cial aircraft must also meet all of the following tests.
3. A corporation and an individual who directly or indi-
rectly owns 80% or more of the value of the out- Acquisition date test. To qualify for the 50% special
standing stock of that corporation. allowance, you must have acquired the property after May
5, 2003, and before January 1, 2005. If a written binding
4. Two corporations that are members of the same con- contract to acquire the property existed before May 6,
trolled group. 2003, the property does not qualify.
5. A trust fiduciary and a corporation if 80% or more of
To qualify for the 30% special allowance, you must have
the value of the outstanding stock is directly or indi-
acquired the property after September 10, 2001, and
rectly owned by or for the trust or grantor of the trust.
before January 1, 2005. If a written binding contract to
6. The grantor and fiduciary, and the fiduciary and ben- acquire the property existed before September 11, 2001,
eficiary, of any trust. the property does not qualify.
Page 24 Chapter 3 Claiming the Special Depreciation Allowance

You can elect to claim the 30% special allow- Original use test. The original use of the property must
TIP ance instead of the 50% allowance for property have begun with you after May 5, 2003, for the 50% special
that qualifies for the 50% allowance. This elec- allowance (after September 10, 2001, for the 30% special
tion applies to all property in the same property class allowance, if applicable). Original use means the first use
placed in service during the tax year. See How Can You to which the property is put, whether or not by you. There-
Elect Not To Claim an Allowance, later. fore, property used by any person before May 6, 2003
Property you manufacture, construct, or produce for (before September 11, 2001, if applicable), does not meet
your own use meets this test if you began the manufacture, the original use test.
construction, or production of the property after May 5, Additional capital expenditures you incurred to recondi-
2003 (after September 10, 2001, for the 30% special allow- tion or rebuild your property meet the original use test.
ance, if applicable), and before January 1, 2005. Property However, the cost of reconditioned or rebuilt property you
that is manufactured, constructed, or produced for your acquired does not meet this test. Property containing used
use by another person under a written binding contract parts will not be treated as reconditioned or rebuilt if the
entered into before the manufacture, construction, or pro- cost of the used parts is not more than 20 percent of the
duction of the property, is considered to be manufactured, total cost of the property.
constructed, or produced by you. If you sold new property you placed in service after May
5, 2003 (after September 10, 2001, if applicable), and you
Placed in service date test. Qualified long production leased it back within 3 months after you originally placed
period property and noncommercial aircraft must be the property in service, the lessor is considered to be the
placed in service before January 1, 2006. original user of the property.
For special rules identifying the original user of property
Extension of placed-in-service date. The IRS may involved in certain other transactions and the original user
extend the December 31, 2005, deadline for meeting the of fractional interests in property, see section
placed in service date test (but not by more than one year) 1.168(k)-1T(b)(3) of the Regulations.
on a case-by-case basis for qualified long production pe- If you acquire new property for personal use and then
riod property and noncommercial aircraft placed in service use the property in your trade or business or for the
or manufactured in the GO Zone, the Rita GO Zone, or the production of income, you are considered to be the original
Wilma GO Zone. This authority applies only to taxpayers user.
that were unable to meet the deadline as a result of
Hurricane Katrina, Rita, and/or Wilma. For information
about the GO Zone, Rita GO Zone, and Wilma GO Zone, Excepted Property
see Publication 4492, Information for Taxpayers Affected
Qualified long production period property and noncommer-
by Hurricanes Katrina, Rita, and Wilma.
cial aircraft do not include any of the following.
Sale-leaseback. If you sold qualified long production
period property or noncommercial aircraft you placed in • Property placed in service and disposed of in the
service after May 5, 2003 (after September 10, 2001, for same tax year.
the 30% special allowance, if applicable), and leased it • Property converted from business use to personal
back within 3 months after you originally placed it in serv- use in the same tax year it is acquired. (Property
ice, the property is treated as originally placed in service no converted from personal use to business use in the
earlier than the date it is used by you under the leaseback. same or later tax year may be qualified property.)
The property will not qualify for the special allowance if • Property required to be depreciated using the Alter-
the lessee or a related person to the lessee or lessor had a native Depreciation System (ADS). This includes
written binding contract in effect for the acquisition of the listed property used 50% or less in a qualified busi-
property before May 6, 2003 (before September 11, 2001, ness use. For other property required to be depreci-
if applicable). ated using ADS, see Required use of ADS under
Syndicated leasing transactions. If qualified long pro- Which Depreciation System (GDS or ADS) Applies,
duction period property or noncommercial aircraft is origi- in Chapter 4.
nally placed in service by a lessor after May 5, 2003 (after • Qualified New York Liberty Zone (Liberty Zone)
September 10, 2001, for the 30% special allowance, if leasehold improvement property (defined next).
applicable), the property is sold within 3 months of the date
it was placed in service, and the user of the property does • Property for which you elected not to claim any spe-
not change, then the property is treated as originally cial depreciation allowance (discussed later).
placed in service by the purchaser no earlier than the date
of the last sale. Qualified Liberty Zone leasehold improvement
Multiple units of property subject to the same lease will property. This is any qualified leasehold improvement
be treated as originally placed in service no earlier than the property (as defined earlier) if all the following require-
date of the last sale if the property is sold within 3 months ments are met.
after the final unit is placed in service and the period
between the times the first and last units are placed in • The improvement is made to a building located in
service does not exceed 12 months. the Liberty Zone (defined under Liberty Zone Prop-
erty in chapter 2).
For special rules explaining when property involved in
certain other transactions is treated as originally placed in • The improvement is placed in service after Septem-
service, see section 1.168(k)-1T(b)(5) of the Regulations. ber 10, 2001, and before January 1, 2007.

• No written binding contract for the improvement was aged or destroyed structural components qualify for the
in effect before September 11, 2001. special Liberty Zone depreciation allowance.
Other Tests To Be Met

Qualified Liberty Zone Property
To be qualified Liberty Zone property, the property must
You can take a special depreciation allowance for qualified also meet all of the following tests.
Liberty Zone property. Your property is qualified Liberty
Zone property if it meets the following requirements. Acquisition date test. You must have acquired the prop-
erty by purchase (as discussed under Property Acquired
1. It is one of the following types of property. by Purchase in chapter 2) after September 10, 2001, and
there must not have been a binding written contract for the
a. Property depreciated under the modified acceler- acquisition in effect before September 11, 2001.
ated cost recovery system (MACRS) with a recov- Property you manufacture, construct, or produce for
ery period of 20 years or less other than new long your own use meets this test if you began the manufacture,
production period property and new noncommer- construction, or production of the property after September
cial aircraft described earlier under What Is Quali- 10, 2001. Property that is manufactured, constructed, or
fied Property. See Can You Use MACRS To produced for your use by another person under a written
Depreciate Your Property in chapter 1. binding contract entered into before the manufacture, con-
b. Water utility property (other than new long produc- struction, or production of the property, is considered to be
tion period property), which is either of the follow- manufactured, constructed, or produced by you.
ing. Placed in service date test. The property must be placed
in service for use in your trade or business or for the
i. Property that is an integral part of the gather- production of income before January 1, 2007 (January 1,
ing, treatment, or commercial distribution of 2010, in the case of qualifying nonresidential real property
water, and that, without regard to this provi- and residential rental property).
sion, would be 20-year property.
Sale-leaseback. If you sold qualified Liberty Zone prop-
ii. Any municipal sewer. erty you placed in service after September 10, 2001, and
leased it back within 3 months after you originally placed it
c. Computer software (other than new long produc- in service, the property is treated as originally placed in
tion period property) that is readily available for service no earlier than the date it is used by you under the
purchase by the general public, is subject to a leaseback.
nonexclusive license, and has not been substan- The property will not qualify for the special allowance if
tially modified. (The cost of some computer the lessee or a related person to the lessee or lessor had a
software is treated as part of the cost of hardware written binding contract in effect for the acquisition of the
and is depreciated under MACRS.) property before September 11, 2001.
d. Certain nonresidential real property and residen- Syndicated leasing transactions. If qualified Liberty
tial rental property (defined next). Zone property is originally placed in service by a lessor
after September 10, 2001, the property is sold within 3
2. It is property that meets certain tests (explained later months of the date it was placed in service, and the user of
under Other Tests To Be Met). the property does not change, then the property is treated
3. It is not excepted property (explained on page 27 as originally placed in service by the taxpayer no earlier
under Excepted Property. 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
Nonresidential real property and residential rental date of sale if the property is sold within 3 months after the
property. This property is qualified Liberty Zone property final unit is placed in service and the period between the
only to the extent it rehabilitates real property damaged, or times the first and last units are placed in service does not
replaces real property destroyed or condemned, as a re- exceed 12 months.
sult of the terrorist attacks of September 11, 2001. Prop- For special rules explaining when property involved in
erty is treated as replacing destroyed or condemned certain other transactions is treated as originally placed in
property if, as part of an integrated plan, such property service, see section 1.168(k)-1T(b)(5) of the Regulations.
replaces real property included in a continuous area that
includes real property destroyed or condemned. Substantial use test. Substantially all (80 percent or
more) of the use of the property must be in the Liberty Zone
For these purposes, real property is considered de-
and in the active conduct of your trade or business in the
stroyed (or condemned) only if an entire building or struc-
Liberty Zone.
ture was destroyed (or condemned) as a result of the
terrorist attacks. Otherwise, the property is considered Original use test. The original use of the property in the
damaged real property. For example, if certain structural Liberty Zone must have begun with you after September
components of a building (such as walls, floors, and 10, 2001.
plumbing fixtures) are damaged or destroyed as a result of Used property can be qualified Liberty Zone property if it
the terrorist attacks, but the building is not destroyed (or has not previously been used within the Liberty Zone. Also,
condemned), then only costs related to replacing the dam- additional capital expenditures you incurred after Septem-

ber 10, 2001, to recondition or rebuild your property meet b. Water utility property, which is either of the follow-
the original use test if the original use of the property in the ing.
Liberty Zone began with you. However, the cost of recondi-
tioned or rebuilt property you acquired does not meet this i. Property that is an integral part of the gather-
test. Property containing used parts will not be treated as ing, treatment, or commercial distribution of
water, and that, without regard to this provi-
reconditioned or rebuilt if the cost of the used parts is not
sion, would be 20-year property.
more than 20 percent of the total cost of the property.
If you sold property you placed in service after Septem- ii. Any municipal sewer.
ber 10, 2001, and you leased it back within 3 months after
you originally placed the property in service, the lessor is c. Computer software that is readily available for
considered to be the original user of the property. purchase by the general public, is subject to a
nonexclusive license, and has not been substan-
For special rules identifying the original user of property
tially modified. (The cost of some computer
involved in certain other transactions and the original user
software is treated as part of the cost of hardware
of fractional interests in property, see section and is depreciated under MACRS.)
1.168(k)-1T(b)(3) of the regulations.
d. Qualified leasehold improvement property (de-
fined earlier in the discussion of qualified lease-
Excepted Property hold improvement property under Long
Production Period Property).
Qualified Liberty Zone property does not include any of the
following. e. Certain nonresidential real property and residen-
tial rental property.
• Property placed in service and disposed of in the
same tax year. 2. It is property that meets certain tests (explained next
• Property converted from business use to personal under Other Tests To Be Met).
use in the same tax year it is acquired. (Property 3. It is not excepted property (explained on page 28
converted from personal use to business use in the under Excepted Property.
same or later tax year may be qualified Liberty Zone
property.)
• Property that also qualifies for the special deprecia- Other Tests To Be Met
tion allowance.
To be qualified GO Zone property, the property must also
• Property required to be depreciated using the Alter- meet all of the following tests.
native Depreciation System (ADS). This includes
listed property used 50% or less in a qualified busi- Acquisition date test. You must have acquired the prop-
ness use. For other property required to be depreci- erty by purchase (as discussed under Property Acquired
ated using ADS, see Required use of ADS under by Purchase in chapter 2) after August 27, 2005, with no
Which Depreciation System (GDS or ADS) Applies, binding written contract for the acquisition in effect before
in Chapter 4. August 28, 2005.
Property you manufacture, construct, or produce for
• Qualified New York Liberty Zone leasehold improve- your own use meets this test if you began the manufacture,
ment property (see Qualified Liberty Zone leasehold construction, or production of the property after August 27,
improvement property, earlier, in the discussion on 2005, and before January 1, 2008. Property that is manu-
excepted property under What Is Qualified Property). factured, constructed, or produced for your use by another
• Property for which you elected not to claim any spe- person under a written binding contract entered into before
cial depreciation allowance (discussed later). the manufacture, construction, or production of the prop-
erty, is considered to be manufactured, constructed, or
produced by you.
Qualified Gulf Opportunity Zone Placed in service date test. The property must be placed
Property in service for use in your trade or business or for the
production of income before January 1, 2008 (January 1,
You can take a special depreciation allowance for qualified 2009, in the case of qualifying nonresidential real property
Gulf Opportunity Zone (GO Zone) property. Your property and residential rental property).
is qualified GO Zone property if it meets the following
requirements. Sale-leaseback. If you sold qualified GO Zone property
you placed in service after August 27, 2005, and leased it
1. It is one of the following types of property. back within 3 months after you originally placed it in serv-
ice, the property is treated as originally placed in service no
a. Property depreciated under the modified acceler- earlier than the date it is used by you under the leaseback.
ated cost recovery system (MACRS) with a recov- The property will not qualify for the special allowance if
ery period of 20 years or less. See Can You Use the lessee or a related person to the lessee or lessor had a
MACRS To Depreciate Your Property in written binding contract in effect for the acquisition of the
chapter 1. property before August 28, 2005.

Syndicated leasing transactions. If qualified GO Qualified revitalization building. This is a commercial

Zone property is originally placed in service by a lessor building and its structural components that you placed in
after August 27, 2005, the property is sold within 3 months service in a renewal community. If the building is new, the
of the date it was placed in service, and the user of the original use of the building must begin with you. If the
property does not change, then the property is treated as building is not new, you must substantially rehabilitate the
originally placed in service by the taxpayer no earlier than building and then place it in service. For more information,
the date of the last sale. including definitions of substantially rehabilitated building
Multiple units of property subject to the same lease will and qualified revitalization expenditure, see Publication
be treated as originally placed in service no earlier than the 954, Tax Incentives for Distressed Communities.
date of sale if the property is sold within 3 months after the Gambling or animal racing property. Gambling or
final unit is placed in service and the period between the animal racing property includes the following personal and
times the first and last units are placed in service does not real property.
exceed 12 months.
• Any equipment, furniture, software, or other property
used directly in connection with gambling, the racing
Substantial use test. Substantially all (80 percent or of animals, or the on-site viewing of such racing.
more) of the use of the property must be in the GO Zone
and in the active conduct of your trade or business in the • Any real property determined by square footage
GO Zone. (other than any portion that is less than 100 square
feet) that is dedicated to gambling, the racing of
Original use test. The original use of the property in the animals, or the on-site viewing of such racing.
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
How Much Can You Deduct?
27, 2005, to recondition or rebuild your property meet the Terms you may need to know
original use test if the original use of the property in the GO (see Glossary):
Zone began with you.
If you sold property you placed in service after August
Adjusted basis
27, 2005, and you leased it back within 3 months after you
originally placed the property in service, the lessor is con- Basis
sidered to be the original user of the property. Placed in service
Excepted Property Figure the special depreciation allowance by multiplying

Qualified GO Zone property does not include any of the the depreciable basis of the qualified property by 50% (or
following. 30% if applicable). For qualified Liberty Zone property,
multiply the depreciable basis by 30%. For qualified GO
• Property required to be depreciated using the Alter- Zone property, multiply the depreciable basis by 50%.
native Depreciation System (ADS). This includes For qualified property other than listed property, enter
listed property used 50% or less in a qualified busi- the special allowance on line 14 in Part II of Form 4562. For
ness use. For other property required to be depreci- qualified property that is listed property, enter the special
ated using ADS, see Required use of ADS under allowance on line 25 in Part V of Form 4562.
Which Depreciation System (GDS or ADS) Applies, If you place qualified property in service in a
in Chapter 4. TIP short tax year, you can take the full amount of a
• Property any portion of which is financed with the special depreciation allowance.
proceeds of a tax-exempt obligation under section
103 of the Internal Revenue Code. Depreciable basis. This is the property’s cost or other
• Any qualified revitalization building (described next) basis multiplied by the percentage of business/investment
for which you have elected to claim a commercial use, reduced by the total amount of any credits and deduc-
revitalization deduction for qualified revitalization ex- tions allocable to the property.
penditures. The following are examples of some credits and deduc-
tions that reduce depreciable basis.
• Any property used in connection with any private or
commercial golf course, country club, massage par- • Any section 179 deduction.
lor, hot tub facility, suntan facility, or any store, the • Any deduction for removal of barriers to the disabled
principal business of which is the sale of alcoholic and the elderly.
beverages for consumption off premises.
• Any disabled access credit, enhanced oil recovery
• Any gambling or animal racing property (defined credit, and credit for employer-provided childcare fa-
later). cilities and services.
• Property for which you elected not to claim any spe- • Basis adjustment to investment credit property under
cial depreciation allowance (discussed later). section 50(c) of the Internal Revenue Code.

For additional credits and deductions that affect basis, Property class
see section 1016 of the Internal Revenue Code.
For long production period property, only the
! part of the depreciable basis attributable to man- You can elect, for any class of property, either:
CAUTION ufacture, construction, or production before Jan- • To deduct the 30% special allowance, instead of the
uary 1, 2005, is eligible for the special depreciation 50% allowance (unless the allowance is for qualified
allowance. GO Zone property), for all property in such class
For information about how to determine the cost or other placed in service during the tax year, or
basis of property, see What Is the Basis of Your Deprecia-
ble Property in chapter 1. For a discussion of business/ • Not to deduct any special allowances for all property
investment use, see Partial business or investment use (including qualified GO Zone property) in such class
under Property Used in Your Business or Income-Produc- placed in service during the tax year.
ing Activity in chapter 1.
For qualified long production period property and non-
Depreciating the remaining cost. After you figure your commercial aircraft acquired before May 6, 2003, and for
special depreciation allowance for your qualified property, qualified Liberty Zone property, you can elect, for any class
you can use the remaining cost to figure your regular of property, not to deduct the 30% special allowance for all
MACRS depreciation deduction (discussed in chapter 4). property in such class placed in service during the year.
Therefore, you must reduce the depreciable basis of the For qualified GO Zone property, you can elect, for any
property by the allowance before figuring your regular class of property, not to deduct the 50% special allowance.
MACRS depreciation deduction. To make an election, attach a statement to your return
indicating what election you are making and the class of
Example 1. On November 1, 2005, Tom Brown bought property for which you are making the election.
and placed in service in his business qualified property (for
example, a noncommercial aircraft) that cost $205,000. He When to make election. Generally, you must make the
did not elect to claim a section 179 deduction. He deducts election on a timely filed tax return (including extensions)
50% of the cost ($102,500) as a special depreciation for the year in which you place the property in service.
allowance for 2005. He uses the remaining $102,500 of However, if you timely filed your return for the year
cost to figure his regular MACRS depreciation deduction without making the election, you can still make the election
for 2005 and later years. by filing an amended return within 6 months of the due date
of the original return (not including extensions). Attach the
Example 2. The facts are the same as in Example 1, election statement to the amended return. On the
except that Tom chooses to deduct $105,000 of the amended return, write “Filed pursuant to section
property’s cost as a section 179 deduction. He uses the 301.9100-2.”
remaining $100,000 of cost to figure his special deprecia-
tion allowance of $50,000 ($100,000 × 50%). He uses the Revoking an election. Once you elect not to deduct a
remaining $50,000 of cost to figure his regular MACRS special depreciation allowance for a class of property, you
depreciation deduction for 2005 and later years. cannot revoke the election without IRS consent. A request
to revoke the election is a request for a letter ruling. See
Like-kind exchanges and involuntary conversions. If Changing Your Accounting Method in chapter 1.
you acquire qualified property in a like-kind exchange or If you elect not to have any special allowance
involuntary conversion, the carryover basis of the acquired
property is eligible for a special depreciation allowance.
!
CAUTION
apply, the property may be subject to an alterna-
tive minimum tax adjustment for depreciation.
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 allow-
ance (the year you place in service the property received in
the exchange or dispose of involuntarily converted prop- When Must You Recapture the
erty), you must reduce the carryover basis of the property
by the allowance before figuring your regular MACRS
Allowance?
depreciation deduction. See Figuring the Deduction for Terms you may need to know
Property Acquired in a Nontaxable Exchange, in chapter 4,
under How Is the Depreciation Deduction Figured. The
(see Glossary):
excess basis (the part of the acquired property’s basis that
exceeds its carryover basis) is also eligible for a special Disposition
depreciation allowance.
Recapture
How Can You Elect Not To When you dispose of property that you depreciated, any
gain on the disposition is generally recaptured (included in
Claim an Allowance? income) as ordinary income up to the amount of the depre-
ciation previously allowed or allowable for the property. A
Terms you may need to know special depreciation allowance deducted for qualified
(see Glossary): property (including qualified Liberty Zone and GO Zone

property) is considered to be depreciation for this purpose Form (and Instructions)

and is therefore subject to recapture. See When Do You
❏ 2106 Employee Business Expenses
Recapture MACRS Depreciation in chapter 4 for more
information. ❏ 2106-EZ Unreimbursed Employee Business
Expenses
Recapture of allowance deducted for qualified GO ❏ 4562 Depreciation and Amortization
Zone property. If, in any year after the year you claim the
special depreciation allowance for qualified GO Zone prop- See chapter 6 for information about getting publications
erty, the property ceases to be qualified GO Zone property, and forms.
you may have to recapture as ordinary income the excess
benefit you received from claiming the special allowance.
Which Depreciation System
(GDS or ADS) Applies?
4. Terms you may need to know
(see Glossary):
Figuring Depreciation Listed property

Under MACRS Nonresidential real property
Placed in service
Property class
Introduction
Recovery period
The Modified Accelerated Cost Recovery System
(MACRS) is used to recover the basis of most business Residential rental property
and investment property placed in service after 1986. Tangible property
MACRS consists of two depreciation systems, the General
Depreciation System (GDS) and the Alternative Deprecia- Tax exempt
tion System (ADS). Generally, these systems provide dif-
ferent methods and recovery periods to use in figuring
Your use of either the General Depreciation System (GDS)
depreciation deductions.
or the Alternative Depreciation System (ADS) to depreci-
To be sure you can use MACRS to figure depre- ate property under MACRS determines what depreciation
!
CAUTION
ciation for your property, see Can You Use
MACRS To Depreciate Your Property in
method and recovery period you use. You generally must
use GDS unless you are specifically required by law to use
chapter 1. ADS or you elect to use ADS.
This chapter explains how to determine which MACRS If you placed your property in service in 2005, complete
depreciation system applies to your property. It also dis- Part III of Form 4562 to report depreciation using MACRS.
cusses other information you need to know before you can Complete section B of Part III to report depreciation using
figure depreciation under MACRS. This information in- GDS, and complete section C of Part III to report deprecia-
cludes the property’s recovery class, placed-in-service tion using ADS. If you placed your property in service
date, and basis, as well as the applicable recovery period, before 2005 and are required to file Form 4562 (as ex-
convention, and depreciation method. It explains how to plained in chapter 1 under Do You Have To File Form
use this information to figure your depreciation deduction 4562), report depreciation using either GDS or ADS on line
and how to use a general asset account to depreciate a 17 in Part III.
group of properties. Finally, it explains when and how to
recapture MACRS depreciation. Required use of ADS. You must use ADS for the follow-
ing property.
Useful Items
You may want to see:
• Listed property used 50% or less in a qualified busi-
ness use. (See chapter 5 for information on listed
property.)
Publication
❏ 225 Farmer’s Tax Guide
• Any tangible property used predominantly outside
the United States during the year.
❏ 463 Travel, Entertainment, Gift, and Car
Expenses
• Any tax-exempt use property.
❏ 544 Sales and Other Dispositions of Assets
• Any tax-exempt bond-financed property.
❏ 551 Basis of Assets
• All property used predominantly in a farming busi-
ness and placed in service in any tax year during
❏ 587 Business Use of Your Home (Including Use which an election not to apply the uniform capitaliza-
by Daycare Providers) tion rules to certain farming costs is in effect.
Page 30 Chapter 4 Figuring Depreciation Under MACRS

• Any property imported from a foreign country for d. Any property used in research and experimenta-
which an Executive Order is in effect because the tion.
country maintains trade restrictions or engages in
e. Breeding cattle and dairy cattle.
other discriminatory acts.
f. Appliances, carpets, furniture, etc., used in a resi-
dential rental real estate activity.
If you are required to use ADS to depreciate your
!
CAUTION
property, you cannot claim any special deprecia-
tion allowance (discussed in chapter 3) for the
g. Any qualified Liberty Zone leasehold improvement
property. See Qualified Liberty Zone leasehold
property. improvement property, later.
Electing ADS. Although your property may qualify for h. Certain geothermal, solar, and wind energy prop-
GDS, you can elect to use ADS. The election generally erty.
must cover all property in the same property class that you
placed in service during the year. However, the election for 3. 7-year property.
residential rental property and nonresidential real property a. Office furniture and fixtures (such as desks, files,
can be made on a property-by-property basis. Once you and safes).
make this election, you can never revoke it.
You make the election by completing line 20 in Part III of b. Agricultural machinery and equipment.
Form 4562. c. Any property that does not have a class life and
has not been designated by law as being in any
other class.
Which Property Class Applies d. Certain motorsports entertainment complex prop-
Under GDS? erty (defined later).
e. Any natural gas gathering line placed in service
Terms you may need to know after April 11, 2005. See Natural gas gathering
(see Glossary): line, natural gas distribution line, and electric
transmission property, later.
Class life
4. 10-year property.
a. Vessels, barges, tugs, and similar water transpor-
Placed in service tation equipment.
Property class b. Any single purpose agricultural or horticultural
Recovery period structure.
Residential rental property c. Any tree or vine bearing fruits or nuts.
Section 1245 property 5. 15-year property.
Section 1250 property
a. Certain improvements made directly to land or
added to it (such as shrubbery, fences, roads, and
bridges).
The following is a list of the nine property classifications
under GDS and examples of the types of property included b. Any retail motor fuels outlet (defined later), such
in each class. These property classes are also listed under as a convenience store.
column (a) in section B, Part III, of Form 4562. c. Any municipal wastewater treatment plant.
1. 3-year property. d. Any qualified leasehold improvement property
(defined later) placed in service before January 1,
a. Tractor units for over-the-road use. 2006.
b. Any race horse over 2 years old when placed in e. Any qualified restaurant property (defined later)
service. placed in service before January 1, 2006.
c. Any other horse (other than a race horse) over 12 f. Initial clearing and grading land improvements for
years old when placed in service. gas utility property.
d. Qualified rent-to-own property (defined later). g. Electric transmission property (that is section
1245 property) used in the transmission at 69 or
2. 5-year property. more kilovolts of electricity placed in service after
a. Automobiles, taxis, buses, and trucks. April 11, 2005. See Natural gas gathering line,
natural gas distribution line, and electric transmis-
b. Computers and peripheral equipment. sion property, later.
c. Office machinery (such as typewriters, calcula-
tors, and copiers).
Chapter 4 Figuring Depreciation Under MACRS Page 31

h. Any natural gas distribution line placed in service Rent-to-own dealer. You are a rent-to-own dealer if
after April 11, 2005. See Natural gas gathering you meet all the following requirements.
line, natural gas distribution line, and electric
transmission property, later.
• You regularly enter into rent-to-own contracts in the
ordinary course of your business for the use of con-
sumer property.
6. 20-year property.
• A substantial portion of these contracts end with the
a. Farm buildings (other than single purpose agricul- customer returning the property before making all
tural or horticultural structures). the payments required to transfer ownership.
b. Municipal sewers not classified as 25-year prop- • The property is tangible personal property of a type
erty. generally used within the home for personal use.
c. Initial clearing and grading land improvements for
electric utility transmission and distribution plants. Rent-to-own contract. This is any lease for the use of
consumer property between a rent-to-own dealer and a
7. 25-year property. This class is water utility property, customer who is an individual which —
which is either of the following. • Is titled “Rent-to-Own Agreement,” “Lease Agree-
a. Property that is an integral part of the gathering, ment with Ownership Option,” or other similar lan-
treatment, or commercial distribution of water, and guage.
that, without regard to this provision, would be • Provides a beginning date and a maximum period of
20-year property. time, not to exceed 156 weeks or 36 months from
b. Municipal sewers other than property placed in the beginning date, for which the contract can be in
service under a binding contract in effect at all effect (including renewals or options to extend).
times since June 9, 1996. • Provides for regular periodic (weekly or monthly)
payments that can be either level or decreasing. If
8. Residential rental property. This is any building or the payments are decreasing, no payment can be
structure, such as a rental home (including a mobile less than 40 percent of the largest payment.
home), if 80% or more of its gross rental income for
the tax year is from dwelling units. A dwelling unit is • Provides for total payments that generally exceed
a house or apartment used to provide living accom- the normal retail price of the property plus interest.
modations in a building or structure. It does not in- • Provides for total payments that do not exceed
clude a unit in a hotel, motel, or other establishment $10,000 for each item of property.
where more than half the units are used on a tran-
sient basis. If you occupy any part of the building or • Provides that the customer has no legal obligation to
structure for personal use, its gross rental income make all payments outlined in the contract and that,
includes the fair rental value of the part you occupy. at the end of each weekly or monthly payment pe-
riod, the customer can either continue to use the
9. Nonresidential real property. This is section 1250 property by making the next payment or return the
property, such as an office building, store, or ware- property in good working order with no further obli-
house, that is neither residential rental property nor gations and no entitlement to a return of any prior
property with a class life of less than 27.5 years. payments.
If your property is not listed above, you can determine its • Provides that legal title to the property remains with
property class from the Table of Class Lives and Recovery the rent-to-own dealer until the customer makes ei-
Periods in Appendix B. The property class is generally the ther all the required payments or the early purchase
same as the GDS recovery period indicated in the table. payments required under the contract to acquire le-
gal title.
Qualified rent-to-own property. Qualified rent-to-own
property is property held by a rent-to-own dealer for pur- • Provides that the customer has no right to sell, sub-
poses of being subject to a rent-to-own contract. It is lease, mortgage, pawn, pledge, or otherwise dispose
tangible personal property generally used in the home for of the property until all contract payments have been
personal use. It includes computers and peripheral equip- made.
ment, televisions, videocassette recorders, stereos,
camcorders, appliances, furniture, washing machines and
Qualified Liberty Zone leasehold improvement prop-
dryers, refrigerators, and other similar consumer durable
erty. For a definition of qualified Liberty Zone leasehold
property. Consumer durable property does not include real
improvement property, see Qualified Liberty Zone lease-
property, aircraft, boats, motor vehicles, or trailers.
hold improvement property in the discussion on excepted
If some of the property you rent to others under a
property under What Is Qualified Property in chapter 3.
rent-to-own agreement is of a type that may be used by the
renters for either personal or business purposes, you still Election out. You can elect not to treat this property as
can treat this property as qualified property as long as it 5-year property. If you make this election, the property will
does not represent a significant portion of your leasing be depreciable under the rules for qualified leasehold im-
property. However, if this dual-use property does repre- provement property. To make the election, attach a state-
sent a significant portion of your leasing property, you must ment to your return indicating that you are making this
prove that this property is qualified rent-to-own property. election under section 1400L(c)(5) of the Internal Revenue

Code. The election applies to all qualified Liberty Zone b. A transfer to a corporation controlled by the trans-
leasehold improvement property placed in service during feror.
the year.
c. An exchange of property by a corporation solely
The election must be made separately by each person
for stock or securities in another corporation in a
owning qualified property (for example, by the partnership,
by the S corporation, or by the common parent of a consoli- reorganization.
dated group).
If you timely filed your return without making an election,
you can still make the election by filing an amended return Qualified restaurant property. Qualified restaurant
within 6 months of the due date of the return (excluding property is any section 1250 property that is an improve-
extensions). Write “Filed pursuant to section 301.9100-2” ment to a building and meets the following requirements.
on the amended return. • The improvement is placed in service more than 3
Once made, the election cannot be revoked without IRS years after the date the building was first placed in
consent. service, and
Motorsports entertainment complex. This is a racing • More than 50% of the building’s square footage is
track facility permanently situated on land that hosts one or devoted to preparation of meals and seating for
more racing events for automobiles, trucks, or motorcycles on-premise consumption of prepared meals.
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. Natural gas gathering line, natural gas distribution
line, and electric transmission property. Any natural
Retail motor fuels outlet. Real property is a retail motor gas gathering line placed in service after April 11, 2005, is
fuels outlet if it is used to a substantial extent in the retail treated as 7-year property, and electric transmission prop-
marketing of petroleum or petroleum products (whether or erty (that is section 1245 property) used in the transmis-
not it is also used to sell food or other convenience items) sion at 69 or more kilovolts of electricity and any natural
and meets any one of the following three tests. gas distribution line placed in service after April 11, 2005,
are treated as 15-year property, if the following require-
• It is not larger than 1,400 square feet. ments are met.
• 50% or more of the gross revenues generated from
the property are derived from petroleum sales. • The original use of the property must have begun
with you after April 11, 2005. Original use means the
• 50% or more of the floor space in the property is first use to which the property is put, whether or not
devoted to petroleum marketing sales. by you. Therefore, property used by any person
A retail motor fuels outlet does not include any facility before April 12, 2005, is not original use. Original
related to petroleum and natural gas trunk pipelines. use includes additional capital expenditures you in-
curred to recondition or rebuild your property. How-
Qualified leasehold improvement property. Generally, ever, original use does not include the cost of
this is any improvement to an interior part of a building that reconditioned or rebuilt property you acquired. Prop-
is nonresidential real property, provided all of the require- erty containing used parts will not be treated as
ments discussed in chapter 3 under Qualified leasehold reconditioned or rebuilt if the cost of the used parts
improvement property are met. is not more than 20 percent of the total cost of the
In addition, an improvement made by the lessor does property.
not qualify as qualified leasehold improvement property to • The property must not be placed in service under a
any subsequent owner unless it is acquired from the origi- binding contract in effect before April 12, 2005.
nal lessor by reason of the lessor’s death or in any of the
following types of transactions. • The property must not be self-constructed property
(property you manufacture, construct, or produce for
1. A transaction to which section 381(a) applies, your own use), if you began the manufacture, con-
2. A mere change in the form of conducting the trade or struction, or production of the property before April
business so long as the property is retained in the 12, 2005. Property that is manufactured, con-
trade or business as qualified leasehold improve- structed, or produced for your use by another person
ment property and the taxpayer retains a substantial under a written binding contract entered into by you
interest in the trade or business, or a related party before the manufacture, construc-
tion, or production of the property, is considered to
3. A like-kind exchange, involuntary conversion, or re- be manufactured, constructed, or produced by you.
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 What Is the Placed-in-Service
your basis in the property is determined by reference
to the transferor’s or distributor’s basis in the prop- Date?
erty. Examples include the following.
a. A complete liquidation of a subsidiary. (see Glossary):
Placed in service the cost or other basis of property, see What Is the Basis of
Your Depreciable Property in chapter 1.
You begin to claim depreciation when your property is

placed in service for either use in a trade or business or the Which Recovery Period
production of income. The placed-in-service date for your
property is the date the property is ready and available for Applies?
a specific use. It is therefore not necessarily the date it is
first used. If you converted property held for personal use Terms you may need to know
to use in a trade or business or for the production of (see Glossary):
income, treat the property as being placed in service on the
conversion date. See Placed in Service under When Does Active conduct of a trade or business
Depreciation Begin and End in chapter 1 for examples
illustrating when property is placed in service. Basis
Improvement
Listed property
What Is the Basis for
Depreciation? Placed in service
Terms you may need to know Property class
(see Glossary): Recovery period
Residential rental property
Basis
The basis for depreciation of MACRS property is the

property’s cost or other basis multiplied by the percentage The recovery period of property is the number of years
of business/investment use. (For a discussion of business/ over which you recover its cost or other basis. It is deter-
investment use, see Partial business or investment use mined based on the depreciation system (GDS or ADS)
under Property Used in Your Business or Income-Produc- used.
ing Activity in chapter 1.) Reduce that amount by any
credits and deductions allocable to the property. The fol- Recovery Periods Under GDS
lowing are examples of some credits and deductions that
reduce basis. Under GDS, property that is not qualified Indian reserva-
tion property is depreciated over one of the following re-
• Any deduction for section 179 property. covery periods.
• Any deduction under section 179B of the Internal
Revenue Code for capital costs to comply with Envi- Property Class Recovery Period
ronmental Protection Agency sulfur regulations.
3-year property . . . . . . . . . . . . . . . . 3 years1
• Any deduction under section 179C of the Internal 5-year property . . . . . . . . . . . . . . . . 5 years
Revenue Code for certain qualified refinery property 7-year property . . . . . . . . . . . . . . . . 7 years
placed in service after August 8, 2005. 10-year property . . . . . . . . . . . . . . . 10 years
• Any deduction for removal of barriers to the disabled 15-year property . . . . . . . . . . . . . . . 15 years2
and the elderly. 20-year property . . . . . . . . . . . . . . . 20 years
25-year property . . . . . . . . . . . . . . . 25 years3
• Any deduction under section 179A of the Internal Residential rental property . . . . . . . 27.5 years
Revenue Code for qualified clean-fuel vehicles and Nonresidential real property . . . . . . 39 years4
qualified clean-fuel vehicle refueling property placed 15 years for qualified rent-to-own property placed in service
in service before January 1, 2006. before August 6, 1997.
• Any disabled access credit, enhanced oil recovery 239 years for property that is a retail motor fuels outlet placed in
credit, and credit for employer-provided childcare fa- service before August 20, 1996 (31.5 years if placed in
cilities and services. service before May 13, 1993), unless you elected to
depreciate it over 15 years.
• Any special depreciation allowance. 320 years for property placed in service before June 13, 1996,
• Basis adjustment for investment credit property or under a binding contract in effect before June 10, 1996.
under section 50(c) of the Internal Revenue Code. 431.5 years for property placed in service before May 13, 1993
(or before January 1, 1994, if the purchase or construction of
For additional credits and deductions that affect basis, the property is under a binding contract in effect before May
see section 1016 of the Internal Revenue Code. 13, 1993, or if construction began before May 13, 1993).
Enter the basis for depreciation under column (c) in Part
III of Form 4562. For information about how to determine

The GDS recovery periods for property not listed above activities are defined in section 4 of the Indian Regu-
can be found in Appendix B, Table of Class Lives and latory Act (25 U.S.C. 2703).)
Recovery Periods. Residential rental property and nonresi-
4. Any property you must depreciate under ADS. Deter-
dential real property are defined earlier under Which Prop-
mine whether property is qualified without regard to
erty Class Applies Under GDS.
the election to use ADS and after applying the spe-
Enter the appropriate recovery period on Form 4562
cial rules for listed property not used predominantly
under column (d) in section B of Part III, unless already
for qualified business use (discussed in chapter 5).
shown (for 25-year property, residential rental property,
and nonresidential real property).
Qualified infrastructure property. Item (1) above
Office in the home. If your home is a personal-use single does not apply to qualified infrastructure property located
family residence and you begin to use part of your home as outside the reservation that is used to connect with quali-
an office, depreciate that part of your home as nonresiden- fied infrastructure property within the reservation. Qualified
tial real property over 39 years (31.5 years if you began infrastructure property is property that meets all the follow-
using it for business before May 13, 1993). However, if ing rules.
your home is an apartment in an apartment building that • It is qualified property, as defined earlier, except that
you own and the building is residential rental property as it is outside the reservation.
defined earlier under Which Property Class Applies Under
GDS, depreciate the part used as an office as residential • It benefits the tribal infrastructure.
rental property over 27.5 years. See Publication 587 for a • It is available to the general public.
discussion of the tests you must meet to claim expenses,
including depreciation, for the business use of your home. • It is placed in service in connection with the active
conduct of a trade or business within a reservation.
Home changed to rental use. If you begin to rent a home
that was your personal home before 1987, you depreciate Infrastructure property includes, but is not limited to, roads,
it as residential rental property over 27.5 years. power lines, water systems, railroad spurs, and communi-
cations facilities.
Related person. For purposes of item (2) above, see
Indian Reservation Property Related persons in the discussion on property owned or
The recovery periods for qualified property you placed in used in 1986 under Can You Use MACRS To Depreciate
service on an Indian reservation after 1993 and before Your Property in chapter 1 for a description of related
2006 are shorter than those listed earlier. The following persons.
table shows these shorter recovery periods.
Indian reservation. The term Indian reservation means a
reservation as defined in section 3(d) of the Indian Financ-
Recovery ing Act of 1974 (25 U.S.C. 1452(d)) or section 4(10) of the
Property Class Period Indian Child Welfare Act of 1978 (25 U.S.C. 1903(10)).
3-year property . . . . . . . . . . . . . . . . . 2 years Section 3(d) of the Indian Financing Act of 1974 defines
5-year property . . . . . . . . . . . . . . . . . 3 years reservation to include former Indian reservations in
7-year property . . . . . . . . . . . . . . . . . 4 years Oklahoma. For a definition of the term “former Indian
10-year property . . . . . . . . . . . . . . . . 6 years reservations in Oklahoma”, see Notice 98-45 in Internal
15-year property . . . . . . . . . . . . . . . . 9 years Revenue Bulletin 1998-35.
20-year property . . . . . . . . . . . . . . . . 12 years
Nonresidential real property . . . . . . . 22 years Recovery Periods Under ADS
Nonresidential real property is defined earlier under
Which Property Class Applies Under GDS. The recovery periods for most property generally are
longer under ADS than they are under GDS. The following
Qualified property. Property eligible for the shorter re- table shows some of the ADS recovery periods.
covery periods are 3-, 5-, 7-, 10-, 15-, and 20-year property
and nonresidential real property. You must use this prop- Recovery
erty predominantly in the active conduct of a trade or Property Period
business within an Indian reservation. The rental of real Rent-to-own property . . . . . . . . . . . . . . . . 4 years
property that is located on an Indian reservation is treated Automobiles and light duty trucks . . . . . . . 5 years
as the active conduct of a trade or business within an Computers and peripheral equipment . . . . 5 years
Indian reservation. High technology telephone station
The following property is not qualified property. equipment installed on customer
premises . . . . . . . . . . . . . . . . . . . . . . . . 5 years
1. Property used or located outside an Indian reserva- High technology medical equipment . . . . . 5 years
tion on a regular basis, other than qualified infra- Personal property with no class life . . . . . . 12 years
structure property. Natural gas gathering lines . . . . . . . . . . . . 14 years1
2. Property acquired directly or indirectly from a related Single purpose agricultural and horticultural
person. structures . . . . . . . . . . . . . . . . . . . . . . . 15 years
Any tree or vine bearing fruit or nuts . . . . . 20 years
3. Property placed in service for purposes of conducting Initial clearing and grading land
or housing class I, II, or III gaming activities. (These improvements for gas utility property . . . 20 years2

Initial clearing and grading land would be residential rental property if you had placed it in
improvements for electric utility service this year.
transmission and distribution plants . . . . 25 years2
Electric transmission property used in the
transmission at 69 or more kilovolts of
electricity . . . . . . . . . . . . . . . . . . . . . . . . 30 years1 Which Convention Applies?
Natural gas distribution lines . . . . . . . . . . . 35 years1
Any qualified leasehold improvement Terms you may need to know
property . . . . . . . . . . . . . . . . . . . . . . . . 39years2 (see Glossary):
Any qualified restaurant property . . . . . . . 39 years2
Nonresidential real property . . . . . . . . . . . 40 years
Residential rental property . . . . . . . . . . . . 40 years Basis
Section 1245 real property not listed in Convention
Appendix B . . . . . . . . . . . . . . . . . . . . . . 40 years
Railroad grading and tunnel bore . . . . . . . 50 years Disposition
1Applicable to property placed in service after April 11, 2005, Nonresidential real property
the original use of which began with you after that date, but
not applicable to property placed in service under a binding Placed in service
contract in effect before April 12, 2005, and self-constructed Recovery period
property for which construction began before that date.
2Applicable Residential rental property
to property placed in service before January 1,
2006.
The ADS recovery periods for property not listed above Under MACRS, averaging conventions establish when the
can be found in the tables in Appendix B. Rent-to-own recovery period begins and ends. The convention you use
property, qualified leasehold improvement property, quali- determines the number of months for which you can claim
fied restaurant property, residential rental property, and depreciation in the year you place property in service and
nonresidential real property are defined earlier under in the year you dispose of the property.
Which Property Class Applies Under GDS.
The mid-month convention. Use this convention for
Tax-exempt use property subject to a lease. The ADS nonresidential real property, residential rental property,
recovery period for any property leased under a lease and any railroad grading or tunnel bore.
agreement to a tax-exempt organization, governmental Under this convention, you treat all property placed in
unit, or foreign person or entity (other than a partnership) service or disposed of during a month as placed in service
cannot be less than 125 percent of the lease term. or disposed of at the midpoint of the month. This means
that a one-half month of depreciation is allowed for the
Additions and Improvements month the property is placed in service or disposed of.
Your use of the mid-month convention is indicated by
An addition or improvement you make to depreciable prop- the “MM” already shown under column (e) in Part III of
erty is treated as separate depreciable property. (See How Form 4562.
Do You Treat Improvements in chapter 1.) Its property
class and recovery period are the same as those that The mid-quarter convention. Use this convention if the
would apply to the original property if you had placed it in mid-month convention does not apply and the total depre-
service at the same time you placed the addition or im- ciable bases of MACRS property you placed in service
provement in service. The recovery period begins on the during the last 3 months of the tax year (excluding nonresi-
later of the following dates. dential real property, residential rental property, any rail-
road grading or tunnel bore, property placed in service and
• The date you place the addition or improvement in disposed of in the same year, and property that is being
service. depreciated under a method other than MACRS) are more
• The date you place in service the property to which than 40% of the total depreciable bases of all MACRS
you made the addition or improvement. 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
If the improvement you make is qualified lease- placed in service or disposed of at the midpoint of that
!
CAUTION
hold improvement property or qualified restau-
rant property (defined earlier under Which
quarter. This means that 11/2 months of depreciation is
allowed for the quarter the property is placed in service or
Property Class Applies Under GDS), the GDS recovery disposed of.
period is 15 years (39 years under ADS).
If you use this convention, enter “MQ” under column (e)
in Part III of Form 4562.
Example. You own a rental home that you have been
renting out since 1981. If you put an addition on the home For purposes of determining whether the
and place the addition in service this year, you would use
MACRS to figure your depreciation deduction for the addi-
!
CAUTION
mid-quarter convention applies, the depreciable
basis of property you placed in service during
tion. Under GDS, the property class for the addition is the tax year reflects the reduction in basis for amounts
residential rental property and its recovery period is 27.5 expensed under section 179 and the part of the basis of
years because the home to which the addition is made 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
Which Depreciation Method
the mid-quarter convention nor the mid-month convention Applies?
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 (see Glossary):
means that a one-half year of depreciation is allowed for
the year the property is placed in service or disposed of. Declining balance method
If you use this convention, enter “HY” under column (e)
in Part III of Form 4562. Listed property
Placed in service
Property class
Recovery period
Residential rental property
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% • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the
DB earlier recovery years
• Changes to SL when that method provides
an equal or greater deduction
GDS using 150% • All farm property (except real property) • Provides a greater deduction during the
DB • All 15- and 20-year property (except qualified earlier recovery years
leasehold improvement property and qualified • Changes to SL when that method provides
restaurant property placed in service before an equal or greater deduction1
January 1, 2006)
• Nonfarm 3-, 5-, 7-, and 10-year property
GDS using SL • Nonresidential real property • Provides for equal yearly deductions (except
• Qualified leasehold improvement property for the first and last years)
placed in service before January 1, 2006
• Qualified restaurant property placed in service
before January 1, 2006
• Residential rental property
• Trees or vines bearing fruit or nuts
• Water utility property
• All 3-, 5-, 7-, 10-, 15-, and 20-year property2
ADS using SL • Listed property used 50% or less for business • Provides for equal yearly deductions
• Property used predominantly outside the U.S.
• Qualified leasehold improvement property
placed in service before January 1, 2006
• Qualified restaurant property placed in service
before January 1, 2006
• 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
method2
1The MACRS percentage tables in Appendix A have the switch to the straight line method built into their rates
2Electivemethod
3See section 168(g)(6) of the Internal Revenue Code

Straight line method 301.9100-2” on the election statement. File the amended
return at the same address you filed the original return.
Tax exempt
Once you make the election, you cannot change it.
If you elect to use a different method for one item
MACRS provides three depreciation methods under GDS
and one depreciation method under ADS.
!
CAUTION
in a property class, you must apply the same
method to all property in that class placed in
• The 200% declining balance method over a GDS service during the year of the election. However, you can
recovery period. make the election on a property-by-property basis for non-
residential real and residential rental property.
• The 150% declining balance method over a GDS
recovery period. 150% election. Instead of using the 200% declining bal-
• The straight line method over a GDS recovery pe- ance method over the GDS recovery period for nonfarm
riod. property in the 3-, 5-, 7-, and 10-year property classes, you
can elect to use the 150% declining balance method. Make
• The straight line method over an ADS recovery pe- the election by entering “150 DB” under column (f) in Part
riod. III of Form 4562.
Straight line election. Instead of using either the 200% or

For property placed in service before 1999, you
150% declining balance methods over the GDS recovery
!
CAUTION
could have elected the 150% declining balance
method using the ADS recovery periods for cer-
period, you can elect to use the straight line method over
the GDS recovery period. Make the election by entering
tain property classes. If you made this election, continue to
“S/L” under column (f) in Part III of Form 4562.
use the same method and recovery period for that prop-
erty. Election of ADS. As explained earlier under Which De-
Table 4-1 lists the types of property you can depreciate preciation System (GDS or ADS) Applies, you can elect to
under each method. It also gives a brief explanation of the use ADS even though your property may come under
method, including any benefits that may apply. GDS. ADS uses the straight line method of depreciation
over fixed ADS recovery periods. Most ADS recovery peri-
Depreciation Methods for Farm ods are listed in Appendix B, or see the table under Recov-
Property ery Periods Under ADS, earlier.
Make the election by completing line 20 in Part III of
If you place personal property in service in a farming Form 4562.
business after 1988, you generally must depreciate it
under GDS using the 150% declining balance method Farm property. Instead of using the 150% declining bal-
unless you are a farmer who must depreciate the property ance method over a GDS recovery period for property you
under ADS using the straight line method or you elect to use in a farming business (other than real property), you
depreciate the property under GDS or ADS using the can elect to depreciate it using either of the following
straight line method. You can depreciate real property methods.
using the straight line method under either GDS or ADS. • The straight line method over a GDS recovery pe-
For a definition of “farming business,” see Which Deprecia- riod.
tion Method Applies in chapter 7 of Publication 225.
• The straight line method over an ADS recovery pe-
Fruit or nut trees and vines. Depreciate trees and vines riod.
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 How Is the Depreciation
ADS for all property you place in service in any year the
election is in effect. See the regulations under section Deduction Figured?
263A of the Internal Revenue Code for information on the
uniform capitalization rules that apply to farm property. Terms you may need to know
(see Glossary):
Electing a Different Method
Adjusted basis
As shown in Table 4-1, you can elect a different method for
Amortization
depreciation for certain types of property. You must make
the election by the due date of the return (including exten- Basis
sions) 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 Clean-fuel vehicle
an amended return within 6 months of the due date of the
Clean-fuel vehicle refueling property
return (excluding extensions). Attach the election to the
amended return and write “Filed pursuant to section Convention

Declining balance method property because of the recapture of part or all of a deduc-
tion for clean-fuel vehicles or the credit for clean-fuel vehi-
Disposition
cle refueling property, you cannot continue to use the
Exchange percentage tables. For the year of the adjustment and the
Nonresidential real property remaining recovery period, you must figure the deprecia-
tion deduction yourself using the property’s adjusted basis
Placed in service at the end of the year. See Figuring the Deduction Without
Property class Using the Tables, later.
Recovery period Basis adjustment due to casualty loss. If you reduce

Straight line method 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
To figure your depreciation deduction under MACRS, you must figure the depreciation yourself using the property’s
first determine the depreciation system, property class, adjusted basis at the end of the year. See Figuring the
placed-in-service date, basis amount, recovery period, Deduction Without Using the Tables, later.
convention, and depreciation method that applies to your
property. Then, you are ready to figure your depreciation Example. On October 26, 2004, Sandra Elm, a calen-
deduction. You can figure it using a percentage table dar year taxpayer, bought and placed in service in her
provided by the IRS, or you can figure it yourself without business a new item of 7-year property. It cost $39,000
using the table. and she elected a section 179 deduction of $24,000. She
also took a special depreciation allowance of $7,500 [50%
Using the MACRS Percentage Tables of $15,000 ($39,000 − $24,000)]. Her unadjusted basis
after the section 179 deduction and special depreciation
To help you figure your deduction under MACRS, the IRS allowance was $7,500 ($15,000 − $7,500). She figured her
has established percentage tables that incorporate the MACRS depreciation deduction using the percentage ta-
applicable convention and depreciation method. These bles. For 2004, her MACRS depreciation deduction was
percentage tables are in Appendix A near the end of this $268.
publication. In July 2005, the property was vandalized and Sandra
Which table to use. Appendix A contains the MACRS had a deductible casualty loss of $3,000. She must adjust
Percentage Table Guide, which is designed to help you the property’s basis for the casualty loss, so she can no
locate the correct percentage table to use for depreciating longer use the percentage tables. Her adjusted basis at the
your property. The percentage tables immediately follow end of 2005, before figuring her 2005 depreciation, is
the guide. $4,232. She figures that amount by subtracting the 2004
MACRS depreciation of $268 and the casualty loss of
$3,000 from the unadjusted basis of $7,500. She must now
Rules Covering the Use of the Tables figure her depreciation for 2005 without using the percent-
age tables.
The following rules cover the use of the percentage tables.
1. You must apply the rates in the percentage tables to Figuring the Unadjusted Basis of
your property’s unadjusted basis. Your Property
2. You cannot use the percentage tables for a short tax
year. See Figuring the Deduction for a Short Tax You must apply the table rates to your property’s unad-
Year, later, for information on the short tax year justed basis each year of the recovery period. Unadjusted
rules. basis is the same basis amount you would use to figure
gain on a sale, but you figure it without reducing your
3. Once you start using the percentage tables for any original basis by any MACRS depreciation taken in earlier
item of property, you generally must continue to use years. However, you do reduce your original basis by other
them for the entire recovery period of the property. amounts, including the following.
4. You must stop using the tables if you adjust the basis • Any amortization taken on the property.
of the property for any reason other than —
• Any section 179 deduction claimed.
a. Depreciation allowed or allowable, or
• Any special depreciation allowance taken on the
b. An addition or improvement to that property that is property.
depreciated as a separate item of property.
• Any deduction claimed for a clean-fuel vehicle or
Basis adjustments other than those made due to the clean-fuel vehicle refueling property placed in serv-
items listed in (4) include an increase in basis for the ice before January 1, 2006.
recapture of a clean-fuel deduction or credit and a reduc- • Any electric vehicle credit.
tion in basis for a casualty loss.
The clean-fuel vehicle and clean-fuel vehicle refueling
Basis adjustment due to recapture of clean-fuel vehi- property deductions and the electric vehicle credit are
cle deduction or credit. If you increase the basis of your discussed in chapter 12 of Publication 535.

For business property you purchase during the year, the property you placed in service this year. You did not elect a
unadjusted basis is its cost minus these and other applica- section 179 deduction and the property is not qualified
ble adjustments. If you trade property, your unadjusted property for purposes of claiming a special depreciation
basis in the property received is the cash paid plus the allowance so your property’s unadjusted basis is its cost,
adjusted basis of the property traded minus these adjust- $10,000. You use GDS and the half-year convention to
ments. figure your depreciation. You refer to the MACRS Percent-
age Table Guide in Appendix A and find that you should
MACRS Worksheet use Table A-1. Multiply your property’s unadjusted basis
each year by the percentage for 7-year property given in
You can use this worksheet to help you figure your depre- Table A-1. You figure your depreciation deduction using
ciation deduction using the percentage tables. (Use a the MACRS worksheet as follows.
separate worksheet for each item of property.) Then, use
the information from this worksheet to prepare Form 4562. MACRS Worksheet
Do not use this worksheet for automobiles. Use
!
CAUTION
the Depreciation Worksheet for Passenger Au-
tomobiles in chapter 5.
Part I
1. MACRS system (GDS or ADS) GDS
2. Property class . . . . . . . . . . . . . . 7-year
3. Date placed in service . . . . . . . . 8/11/05
4. Recovery period . . . . . . . . . . . . 7-Year
MACRS Worksheet
5. Method and convention . . . . . . . 200%DB/Half-Year
6. Depreciation rate (from tables) .1429
Part I
Part II
1. MACRS system (GDS or ADS) . . . . 7. Cost or other basis* . . . . . . . . . . $10,000
2. Property class . . . . . . . . . . . . . . . . . 8. Business/investment use . . . . . . 100%
3. Date placed in service . . . . . . . . . . . 9. Multiply line 7 by line 8 . . . . . . . . . . . . . $10,000
4. Recovery period . . . . . . . . . . . . . . . 10. Total claimed for section 179 deduction
5. Method and convention . . . . . . . . . . and other items, including deduction for
6. Depreciation rate (from tables) . . . . clean-fuel vehicle refueling property . . . -0-
Part II 11. Subtract line 10 from line 9. This is your
tentative basis for depreciation . . . . . . . $10,000
7. Cost or other basis* . . . . . . . . . . . . . $
12. Multiply line 11 by .30 if the 30% special
8. Business/investment use . . . . . . . . . %
depreciation allowance applies. Multiply
9. Multiply line 7 by line 8 . . . . . . . . . . . . . . . . $ line 11 by .50 if the 50% special
10. Total claimed for section 179 deduction and depreciation allowance applies. This is
other items, including deduction for your special depreciation allowance.
clean-fuel vehicle refueling property . . . . . . $ Enter -0- if this is not the year you
11. Subtract line 10 from line 9. This is your placed the property in service, the
tentative basis for depreciation . . . . . . . . . . $ property is not qualified property, or you
12. Multiply line 11 by .30 if the 30% special elected not to claim a special allowance -0-
depreciation allowance applies. Multiply line 13. Subtract line 12 from line 11. This is
11 by .50 if the 50% special depreciation your basis for depreciation . . . . . . . . . . $10,000
allowance applies. This is your special 14. Depreciation rate (from line 6) . . . . . . . . .1429
depreciation allowance. Enter -0- if this is not 15. Multiply line 13 by line 14. This is your
the year you placed the property in service, MACRS depreciation deduction . . . . . . . $1,429
the property is not qualified property, or you
elected not to claim a special allowance . . . $ *If real estate, do not include cost (basis) of land.
13. Subtract line 12 from line 11. This is your
basis for depreciation . . . . . . . . . . . . . . . . . If there are no adjustments to the basis of the property
14. Depreciation rate (from line 6) . . . . . . . . . . . other than depreciation, your depreciation deduction for
15. Multiply line 13 by line 14. This is your each subsequent year of the recovery period will be as
MACRS depreciation deduction . . . . . . . . . . $ follows.
*If real estate, do not include cost (basis) of land.
Year Basis Percentage Deduction
The following example shows how to figure your 2006 . . . . . . . . . . . $10,000 24.49% $2,449
MACRS depreciation deduction using the percentage ta- 2007 . . . . . . . . . . . 10,000 17.49 1,749
bles and the MACRS worksheet. 2008 . . . . . . . . . . . 10,000 12.49 1,249
2009 . . . . . . . . . . . 10,000 8.93 893
Example. You bought office furniture (7-year property) 2010 . . . . . . . . . . . 10,000 8.92 892
for $10,000 and placed it in service on August 11, 2005. 2011 . . . . . . . . . . . 10,000 8.93 893
You use the furniture only for business. This is the only 2012 . . . . . . . . . . . 10,000 4.46 446

Examples Year Property Basis Percentage Deduction
The following examples are provided to show you how to 1st Machine $4,000 25.00 $1,000
use the percentage tables. In both examples, assume the 2nd Machine 4,000 21.43 857
following.
1st Furniture 1,000 10.71 107
• You use the property only for business. 2nd Furniture 1,000 25.51 255
• You use the calendar year as your tax year.
1st Computer 5,000 5.00 250
• You use GDS for all the properties. 2nd Computer 5,000 38.00 1,900
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 Sale or Other Disposition Before the
land cost $20,000. It is nonresidential real property. The Recovery Period Ends
building’s unadjusted basis is its original cost, $100,000.
You refer to the MACRS Percentage Table Guide in If you sell or otherwise dispose of your property before the
Appendix A and find that you should use Table A-7a. end of its recovery period, your depreciation deduction for
March is the third month of your tax year, so multiply the the year of the disposition will be only part of the deprecia-
building’s unadjusted basis, $100,000, by the percentages tion amount for the full year. You have disposed of your
for the third month in Table A-7a. Your depreciation deduc- property if you have permanently withdrawn it from use in
tion for each of the first 3 years is as follows: your business or income-producing activity because of its
sale, exchange, retirement, abandonment, involuntary
Year Basis Percentage Deduction conversion, or destruction. After you figure the full-year
depreciation amount, figure the deductible part using the
1st . . . . . . . . . . . . $100,000 2.033% $2,033 convention that applies to the property.
2nd . . . . . . . . . . . . 100,000 2.564 2,564
3rd . . . . . . . . . . . . 100,000 2.564 2,564 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 deter-
Example 2. During the year, you bought a machine
mined for the full year.
(7-year property) for $4,000, office furniture (7-year prop-
erty) for $1,000, and a computer (5-year property) for Mid-quarter convention used. For property for which
$5,000. You placed the machine in service in January, the you used the mid-quarter convention, figure your deprecia-
furniture in September, and the computer in October. You tion deduction for the year of the disposition by multiplying
do not elect a section 179 deduction and none of these a full year of depreciation by the percentage listed below
items is qualified property for purposes of claiming a spe- for the quarter in which you disposed of the property.
cial depreciation allowance.
You placed property in service during the last three Quarter Percentage
months of the year, so you must first determine if you have First . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.5%
to use the mid-quarter convention. The total bases of all Second . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.5
property you placed in service during the year is $10,000. Third . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62.5
The $5,000 basis of the computer, which you placed in Fourth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87.5
service during the last 3 months (the fourth quarter) of your
tax year, is more than 40% of the total bases of all property Example. On December 2, 2002, you placed in service
($10,000) you placed in service during the year. Therefore, an item of 5-year property costing $10,000. You did not
you must use the mid-quarter convention for all three claim a section 179 deduction and the property does not
items. qualify for a special depreciation allowance. Your unad-
You refer to the MACRS Percentage Table Guide in justed basis for the property was $10,000. You used the
Appendix A to determine which table you should use under mid-quarter convention because this was the only item of
the mid-quarter convention. The machine is 7-year prop- business property you placed in service in 2002 and it was
erty placed in service in the first quarter, so you use Table placed in service during the last 3 months of your tax year.
A-2. The furniture is 7-year property placed in service in Your property is in the 5-year property class, so you used
the third quarter, so you use Table A-4. Finally, because Table A-5 to figure your depreciation deduction. Your de-
the computer is 5-year property placed in service in the ductions for 2002, 2003, and 2004 were $500 (5% of
fourth quarter, you use Table A-5. Knowing what table to $10,000), $3,800 (38% of $10,000), and $2,280 (22.80%
use for each property, you figure the depreciation for the of $10,000). You disposed of the property on April 6, 2005.
first 2 years as follows. To determine your depreciation deduction for 2005, 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 depreci-
ation deduction of $513 for 2005.
Mid-month convention used. If you dispose of residen-
tial rental or nonresidential real property, figure your depre-
ciation deduction for the year of the disposition by

multiplying a full year of depreciation by a fraction. The Figuring depreciation under the declining balance
numerator of the fraction is the number of months (includ- method and switching to the straight line method is illus-
ing partial months) in the year that the property is consid- trated in Example 1, later, under Examples.
ered in service. The denominator is 12.
Declining balance rate. You figure your declining bal-
Example. On July 2, 2003, you purchased and placed ance rate by dividing the specified declining balance per-
centage (150% or 200% changed to a decimal) by the
in service residential rental property. The property cost
number of years in the property’s recovery period. For
$100,000, not including the cost of land. You used Table
example, for 3-year property depreciated using the 200%
A-6 to figure your MACRS depreciation for this property. declining balance method, divide 2.00 (200%) by 3 to get
You sold the property on March 2, 2005. You file your tax 0.6667, or a 66.67% declining balance rate. For 15-year
return based on the calendar year. property depreciated using the 150% declining balance
A full year of depreciation for 2005 is $3,636. This is method, divide 1.50 (150%) by 15 to get 0.10, or a 10%
$100,000 multiplied by .03636 (the percentage for the declining balance rate.
seventh month of the third recovery year) from Table A-6. The following table shows the declining balance rate for
You then apply the mid-month convention for the 21/2 each property class and the first year for which the straight
months of use in 2005. (Treat the month of disposition as line method gives an equal or greater deduction.
one-half month of use.) Multiply $3,636 by the fraction, 2.5
over 12, to get your 2005 depreciation deduction of Property Declining Balance
$757.50. Class Method Rate Year
3-year 200% DB 66.667% 3rd
Figuring the Deduction Without Using 5-year 200% DB 40.0 4th
the Tables 7-year 200% DB 28.571 5th
Instead of using the rates in the percentage tables to figure 10-year 200% DB 20.0 7th
your depreciation deduction, you can figure it yourself. 15-year 150% DB 10.0 7th
Before making the computation each year, you must re-
duce your adjusted basis in the property by the deprecia- 20-year 150% DB 7.5 9th
tion claimed the previous year.
Figuring MACRS deductions without using the
!
CAUTION
tables generally will result in a slightly different
amount than using the tables.
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
Declining Balance Method year you place the property in service and the year you
dispose of the property.
When using a declining balance method, you apply the You figure depreciation for the year you place property
same depreciation rate each year to the adjusted basis of in service as follows.
your property. You must use the applicable convention for
the first tax year and you must switch to the straight line 1. Multiply your adjusted basis in the property by the
method beginning in the first year for which it will give an straight line rate.
equal or greater deduction. The straight line method is 2. Apply the applicable convention.
explained later.
You figure depreciation for all other years (including the
You figure depreciation for the year you place property year you switch from the declining balance method to the
in service as follows. straight line method) as follows.
1. Multiply your adjusted basis in the property by the 1. Reduce your adjusted basis in the property by the
declining balance rate. depreciation allowed or allowable in earlier years
2. Apply the applicable convention. (under any method).
You figure depreciation for all other years (before the 2. Determine the depreciation rate for the year.
year you switch to the straight line method) as follows. 3. Multiply the adjusted basis figured in (1) by the de-
preciation rate figured in (2).
1. Reduce your adjusted basis in the property by the
If you dispose of property before the end of its recovery
depreciation allowed or allowable in earlier years. period, see Using the Applicable Convention, later, for
2. Multiply this new adjusted basis by the same declin- information on how to figure depreciation for the year you
ing balance rate used in earlier years. dispose of it.
If you dispose of property before the end of its recovery Straight line rate. You determine the straight line depre-
period, see Using the Applicable Convention, later, for ciation rate for any tax year by dividing the number 1 by the
information on how to figure depreciation for the year you years remaining in the recovery period at the beginning of
dispose of it. that year. When figuring the number of years remaining,

you must take into account the convention used in the year tion by the percentage listed below for the quarter you
you placed the property in service. If the number of years dispose of the property.
remaining is less than 1, the depreciation rate for that tax
year is 1.0 (100%). Quarter Percentage
First . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.5%
Second . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.5
Using the Applicable Convention Third . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62.5
Fourth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87.5
The applicable convention (discussed earlier under Which
Convention Applies) affects how you figure your deprecia- If you hold the property for the entire recovery period,
tion deduction for the year you place your property in your depreciation deduction for the year that includes the
service and for the year you dispose of it. It determines final quarter of the recovery period is the amount of your
how much of the recovery period remains at the beginning unrecovered basis in the property.
of each year, so it also affects the depreciation rate for
property you depreciate under the straight line method. Mid-month convention. If this convention applies, the
See Straight line rate in the previous discussion. Use the depreciation you can deduct for the first year that you
applicable convention as explained in the following discus- depreciate the property depends on the month in which
sions. you place the property in service. Figure your depreciation
deduction for the year you place the property in service by
Half-year convention. If this convention applies, you de- multiplying the depreciation for a full year by a fraction. The
duct a half-year of depreciation for the first year and the numerator of the fraction is the number of full months in the
last year that you depreciate the property. You deduct a full year that the property is in service plus 1/2 (or 0.5). The
year of depreciation for any other year during the recovery denominator is 12.
period. If you dispose of the property before the end of the
Figure your depreciation deduction for the year you recovery period, figure your depreciation deduction for the
place the property in service by dividing the depreciation year of the disposition the same way. If you hold the
for a full year by 2. If you dispose of the property before the property for the entire recovery period, your depreciation
end of the recovery period, figure your depreciation deduc- deduction for the year that includes the final month of the
tion for the year of the disposition the same way. If you hold recovery period is the amount of your unrecovered basis in
the property for the entire recovery period, your deprecia- the property.
tion deduction for the year that includes the final 6 months
of the recovery period is the amount of your unrecovered Example. You use the calendar year and place non-
basis in the property. residential real property in service in August. The property
Mid-quarter convention. If this convention applies, the is in service 4 full months (September, October, Novem-
depreciation you can deduct for the first year you depreci- ber, and December). Your numerator is 4.5 (4 full months
ate the property depends on the quarter in which you place plus 0.5). You multiply the depreciation for a full year by
the property in service. 4.5/12, or 0.375.
A quarter of a full 12-month tax year is a period of 3
months. The first quarter in a year begins on the first day of Examples
the tax year. The second quarter begins on the first day of
the fourth month of the tax year. The third quarter begins The following examples show how to figure depreciation
on the first day of the seventh month of the tax year. The under MACRS without using the percentage tables.
fourth quarter begins on the first day of the tenth month of Figures are rounded for purposes of the examples. As-
the tax year. A calendar year is divided into the following sume for all the examples that you use a calendar year as
quarters. your tax year.
Quarter Months Example 1 —200% DB method and half-year conven-
First . . . . . . . . . . . . . . January, February, March tion. In February, you placed in service depreciable prop-
Second . . . . . . . . . . . . April, May, June erty with a 5-year recovery period and a basis of $1,000.
Third . . . . . . . . . . . . . . July, August, September You do not elect to take the section 179 deduction and the
Fourth . . . . . . . . . . . . . October, November, December property does not qualify for a special depreciation allow-
Figure your depreciation deduction for the year you ance. You use GDS and the 200% declining balance (DB)
place the property in service by multiplying the deprecia- method to figure your depreciation. When the straight line
tion for a full year by the percentage listed below for the (SL) method results in an equal or larger deduction, you
quarter you place the property in service. switch to the SL method. You did not place any property in
service in the last 3 months of the year, so you must use
Quarter Percentage the half-year convention.
First . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87.5% First year. You figure the depreciation rate under the
Second . . . . . . . . . . . . . . . . . . . . . . . . . . . 62.5 200% DB method by dividing 2 (200%) by 5 (the number of
Third . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.5 years in the recovery period). The result is 40%. You
Fourth . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.5 multiply the adjusted basis of the property ($1,000) by the
If you dispose of the property before the end of the 40% DB rate. You apply the half-year convention by divid-
recovery period, figure your depreciation deduction for the ing the result ($400) by 2. Depreciation for the first year
year of the disposition by multiplying a full year of deprecia- under the 200% DB method is $200.

You figure the depreciation rate under the straight line First year. You figure the SL depreciation rate for the
(SL) method by dividing 1 by 5, the number of years in the building by dividing 1 by 39 years. The result is .02564. The
recovery period. The result is 20%.You multiply the ad- depreciation for a full year is $2,564 ($100,000 × .02564).
justed basis of the property ($1,000) by the 20% SL rate. Under the mid-month convention, you treat the property as
You apply the half-year convention by dividing the result placed in service in the middle of January. You get 11.5
($200) by 2. Depreciation for the first year under the SL months of depreciation for the year. Expressed as a deci-
method is $100. mal, the fraction of 11.5 months divided by 12 months is
The DB method provides a larger deduction, so you .958. Your first-year depreciation for the building is $2,456
deduct the $200 figured under the 200% DB method. ($2,564 × .958).
Second year. You reduce the adjusted basis ($1,000) Second year. You subtract $2,456 from $100,000 to
by the depreciation claimed in the first year ($200). You get your adjusted basis of $97,544 for the second year.
multiply the result ($800) by the DB rate (40%). Deprecia- The SL rate is .02629. This is 1 divided by the remaining
tion for the second year under the 200% DB method is recovery period of 38.042 years (39 years reduced by 11.5
$320. months or .958 year). Your depreciation for the building for
You figure the SL depreciation rate by dividing 1 by 4.5, the second year is $2,564 ($97,544 × .02629).
the number of years remaining in the recovery period. Third year. The adjusted basis is $94,980 ($97,544 −
(Based on the half-year convention, you used only half a $2,564). The SL rate is .027 (1 divided by 37.042 remain-
year of the recovery period in the first year.) You multiply ing years). Your depreciation for the third year is $2,564
the reduced adjusted basis ($800) by the result (22.22%).
($94,980 × .027).
Depreciation under the SL method for the second year is
$178.
Example 3 —200% DB method and mid-quarter con-
The DB method provides a larger deduction, so you vention. During the year, you bought and placed in serv-
deduct the $320 figured under the 200% DB method.
ice in your business the following items.
Third year. You reduce the adjusted basis ($800) by
the depreciation claimed in the second year ($320). You Month Placed
multiply the result ($480) by the DB rate (40%). Deprecia- Item in Service Cost
tion for the third year under the 200% DB method is $192.
You figure the SL depreciation rate by dividing 1 by 3.5. Safe January $4,000
You multiply the reduced adjusted basis ($480) by the
result (28.57%). Depreciation under the SL method for the Office furniture September 1,000
third year is $137. Computer (not listed property) October 5,000
The DB method provides a larger deduction, so you
deduct the $192 figured under the 200% DB method. You do not elect a section 179 deduction and these items
Fourth year. You reduce the adjusted basis ($480) by do not qualify for a special depreciation allowance. You
the depreciation claimed in the third year ($192). You use GDS and the 200% declining balance (DB) method to
multiply the result ($288) by the DB rate (40%). Deprecia- figure the depreciation. The total bases of all property you
tion for the fourth year under the 200% DB method is $115. placed in service this year is $10,000. The basis of the
You figure the SL depreciation rate by dividing 1 by 2.5. computer ($5,000) is more than 40% of the total bases of
You multiply the reduced adjusted basis ($288) by the all property placed in service during the year ($10,000), so
result (40%). Depreciation under the SL method for the you must use the mid-quarter convention. This convention
fourth year is $115. applies to all three items of property. The safe and office
The SL method provides an equal deduction, so you furniture are 7-year property and the computer is 5-year
switch to the SL method and deduct the $115. property.
Fifth year. You reduce the adjusted basis ($288) by the First and second year depreciation for safe. The
depreciation claimed in the fourth year ($115) to get the 200% DB rate for 7-year property is .28571. You determine
reduced adjusted basis of $173. You figure the SL depreci-
this by dividing 2.00 (200%) by 7 years. The depreciation
ation rate by dividing 1 by 1.5. You multiply the reduced
for the safe for a full year is $1,143 ($4,000 × .28571). You
adjusted basis ($173) by the result (66.67%). Depreciation
placed the safe in service in the first quarter of your tax
under the SL method for the fifth year is $115.
year, so you multiply $1,143 by 87.5% (the mid-quarter
Sixth year. You reduce the adjusted basis ($173) by the
percentage for the first quarter). The result, $1,000, is your
depreciation claimed in the fifth year ($115) to get the
deduction for depreciation on the safe for the first year.
reduced adjusted basis of $58. There is less than one year
remaining in the recovery period, so the SL depreciation For the second year, the adjusted basis of the safe is
rate for the sixth year is 100%. You multiply the reduced $3,000. You figure this by subtracting the first year’s depre-
adjusted basis ($58) by 100% to arrive at the depreciation ciation ($1,000) from the basis of the safe ($4,000). Your
deduction for the sixth year ($58). depreciation deduction for the second year is $857 ($3,000
× .28571).
Example 2 —SL method and mid-month convention. First and second year depreciation for furniture. The
In January, you bought and placed in service a building for furniture is also 7-year property, so you use the same
$100,000 that is nonresidential real property with a recov- 200% DB rate of .28571. You multiply the basis of the
ery period of 39 years. The adjusted basis of the building is furniture ($1,000) by .28571 to get the depreciation of $286
its cost of $100,000. You use GDS, the straight line (SL) for the full year. You placed the furniture in service in the
method, and the mid-month convention to figure your de- third quarter of your tax year, so you multiply $286 by
preciation. 37.5% (the mid-quarter percentage for the third quarter).

The result, $107, is your deduction for depreciation on the Property Acquired in a Like-kind Exchange
furniture for the first year. or Involuntary Conversion
For the second year, the adjusted basis of the furniture
is $893. You figure this by subtracting the first year’s You generally must depreciate the carryover basis of prop-
depreciation ($107) from the basis of the furniture erty acquired in a like-kind exchange or involuntary conver-
($1,000). Your depreciation for the second year is $255 sion over the remaining recovery period of the property
($893 × .28571). exchanged or involuntarily converted. You also generally
First and second year depreciation for computer. continue to use the same depreciation method and con-
The 200% DB rate for 5-year property is .40. You deter- vention used for the exchanged or involuntarily converted
mine this by dividing 2.00 (200%) by 5 years. The depreci- property. This applies only to acquired property with the
same or a shorter recovery period and the same or more
ation for the computer for a full year is $2,000 ($5,000 ×
accelerated depreciation method than the property ex-
.40). You placed the computer in service in the fourth
changed or involuntarily converted. The excess basis (the
quarter of your tax year, so you multiply the $2,000 by
part of the acquired property’s basis that exceeds its carry-
12.5% (the mid-quarter percentage for the fourth quarter). over basis), if any, of the acquired property is treated as
The result, $250, is your deduction for depreciation on the newly placed in service property.
computer for the first year.
For the second year, the adjusted basis of the computer For acquired property that has a longer recovery period
is $4,750. You figure this by subtracting the first year’s or less accelerated depreciation method than the ex-
depreciation ($250) from the basis of the computer changed or involuntarily converted property, you generally
must depreciate the carryover basis of the acquired prop-
($5,000). Your depreciation deduction for the second year
erty as if it were placed in service in the same tax year as
is $1,900 ($4,750 × .40).
the exchanged or involuntarily converted property. You
also generally continue to use the longer recovery period
Example 4 —200% DB method and half-year conven-
and less accelerated depreciation method of the acquired
tion. Last year, in July, you bought and placed in service
property.
in your business a new item of 7-year property. This was
the only item of property you placed in service last year. If the MACRS property you acquired in the exchange or
The property cost $39,000 and you elected a $24,000 involuntary conversion is qualified property, discussed ear-
section 179 deduction. You also took a special deprecia- lier in chapter 3 under What Is Qualified Property, you can
tion allowance of $7,500. Your unadjusted basis for the claim a special depreciation allowance on the carryover
property is $7,500. Because you did not place any property basis.
in service in the last 3 months of your tax year, you used Special rules apply to vehicles acquired in a trade-in.
the half-year convention. You figured your deduction using For information on how to figure depreciation for a vehicle
the percentages in Table A-1 for 7-year property. Last acquired in a trade-in that is subject to the passenger
year, your depreciation was $1,072 ($7,500 × 14.29%). automobile limits, see Deductions For Passenger Automo-
In July of this year, your property was vandalized. You biles Acquired in a Trade-in under Do the Passenger
had a deductible casualty loss of $3,000. You spent $3,500 Automobile Limits Apply in chapter 5.
to put the property back in operational order. Your adjusted Election out. Instead of using the above rules, you can
basis at the end of this year is $6,928. You figured this by elect, for depreciation purposes, to treat the adjusted basis
first subtracting the first year’s depreciation ($1,072) and of the exchanged or involuntarily converted property as if
the casualty loss ($3,000) from the unadjusted basis of disposed of at the time of the exchange or involuntary
$7,500. To this amount ($3,428), you then added the conversion. Treat the carryover basis and excess basis, if
$3,500 repair cost. any, for the acquired property as if placed in service the
You cannot use the table percentages to figure your later of the date you acquired it or the time of the disposi-
depreciation for this property for this year because of the tion of the exchanged or involuntarily converted property.
adjustments to basis. You must figure the deduction your- The depreciable basis of the new property is the adjusted
self. You determine the DB rate by dividing 2.00 (200%) by basis of the exchanged or involuntarily converted property
7 years. The result is .28571 or 28.571%. You multiply the plus any additional amount you paid for it. The election, if
adjusted basis of your property ($6,928) by the declining made, applies to both the acquired property and the ex-
balance rate of .28571 to get your depreciation deduction changed or involuntarily converted property. This election
of $1,979 for this year. does not affect the amount of gain or loss recognized on
the exchange or involuntary conversion.
Figuring the Deduction for Property When to make the election. You must make the elec-
Acquired in a Nontaxable Exchange tion on a timely filed return (including extensions) for the
year of replacement. The election must be made sepa-
If your property has a carryover basis because you ac- rately by each person acquiring replacement property. In
quired it in a nontaxable transfer such as a like-kind ex- the case of a partnership, S corporation, or consolidated
change or involuntary conversion, you must generally group, the election is made by the partnership, by the S
figure depreciation for the property as if the transfer had corporation, or by the common parent of a consolidated
not occurred. However, see Like-kind exchanges and in- group, respectively. Once made, the election may not be
voluntary conversions, earlier, in chapter 3 under How revoked without IRS consent.
Much Can You Deduct and Property Acquired in a For more information and special rules, see the Instruc-
Like-kind Exchange or Involuntary Conversion, next. tions for Form 4562.

Property Acquired in a Nontaxable Transfer First or last day of month. For a short tax year begin-
ning on the first day of a month or ending on the last day of
You must depreciate MACRS property acquired by a cor- a month, the tax year consists of the number of months in
poration or partnership in certain nontaxable transfers over the tax year. If the short tax year includes part of a month,
the property’s remaining recovery period in the transferor’s you generally include the full month in the number of
hands, as if the transfer had not occurred. You must months in the tax year. You determine the midpoint of the
continue to use the same depreciation method and con- tax year by dividing the number of months in the tax year
vention as the transferor. You can depreciate the part of by 2. For the half-year convention, you treat property as
the property’s basis that exceeds its carryover basis (the placed in service or disposed of on either the first day or
transferor’s adjusted basis in the property) as newly pur- the midpoint of a month.
chased MACRS property. For example, a short tax year that begins on June 20
The nontaxable transfers covered by this rule include and ends on December 31 consists of 7 months. You use
the following. only full months for this determination, so you treat the tax
• A distribution in complete liquidation of a subsidiary. year as beginning on June 1 instead of June 20. The
midpoint of the tax year is the middle of September (31/2
• A transfer to a corporation controlled by the trans- months from the beginning of the tax year). You treat
feror. property as placed in service or disposed of on this mid-
• An exchange of property solely for corporate stock point.
or securities in a reorganization.
Example. Tara Corporation, a calendar year taxpayer,
• A contribution of property to a partnership in ex- was incorporated on March 15. For purposes of the
change for a partnership interest. half-year convention, it has a short tax year of 10 months,
• A partnership distribution of property to a partner. ending on December 31, 2005. During the short tax year,
Tara placed property in service for which it uses the
half-year convention. Tara treats this property as placed in
Figuring the Deduction for a Short service on the first day of the sixth month of the short tax
year, or August 1, 2005.
Tax Year
Not on first or last day of month. For a short tax year
You cannot use the MACRS percentage tables to deter- not beginning on the first day of a month and not ending on
mine depreciation for a short tax year. A short tax year is the last day of a month, the tax year consists of the number
any tax year with less than 12 full months. This section of days in the tax year. You determine the midpoint of the
discusses the rules for determining the depreciation de- tax year by dividing the number of days in the tax year by 2.
duction for property you place in service or dispose of in a For the half-year convention, you treat property as placed
short tax year. It also discusses the rules for determining in service or disposed of on either the first day or the
depreciation when you have a short tax year during the midpoint of a month. If the result of dividing the number of
recovery period (other than the year the property is placed days in the tax year by 2 is not the first day or the midpoint
in service or disposed of). of a month, you treat the property as placed in service or
For more information on figuring depreciation for a short disposed of on the nearest preceding first day or midpoint
tax year, see Revenue Procedure 89-15, 1989-1 C.B. 816. of a month.
Mid-quarter convention. To determine if you must use

Using the Applicable Convention in a Short the mid-quarter convention, compare the basis of property
Tax Year you place in service in the last 3 months of your tax year to
The applicable convention establishes the date property is that of property you place in service during the full tax year.
treated as placed in service and disposed of. Depreciation The length of your tax year does not matter. If you have a
is allowable only for that part of the tax year the property is short tax year of 3 months or less, use the mid-quarter
treated as in service. The recovery period begins on the convention for all applicable property you place in service
placed-in-service date determined by applying the conven- during that tax year.
tion. The remaining recovery period at the beginning of the You treat property under the mid-quarter convention as
next tax year is the full recovery period less the part for placed in service or disposed of on the midpoint of the
which depreciation was allowable in the first tax year. quarter of the tax year in which it is placed in service or
The following discussions explain how to use the appli- disposed of. Divide a short tax year into 4 quarters and
cable convention in a short tax year. determine the midpoint of each quarter.
For a short tax year of 4 or 8 full calendar months,
Mid-month convention. Under the mid-month conven- determine quarters on the basis of whole months. The
tion, you always treat your property as placed in service or midpoint of each quarter is either the first day or the
disposed of on the midpoint of the month it is placed in midpoint of a month. Treat property as placed in service or
service or disposed of. You apply this rule without regard to disposed of on this midpoint.
your tax year.
To determine the midpoint of a quarter for a short tax
Half-year convention. Under the half-year convention, year of other than 4 or 8 full calendar months, complete the
you treat property as placed in service or disposed of on following steps.
the midpoint of the tax year it is placed in service or
disposed of. 1. Determine the number of days in your short tax year.

2. Determine the number of days in each quarter by is 12. See Depreciation After a Short Tax Year, later, for
dividing the number of days in your short tax year by information on how to figure depreciation in later years.
4.
Example 1 —half-year convention. Tara Corporation,
3. Determine the midpoint of each quarter by dividing
with a short tax year beginning March 15 and ending
the number of days in each quarter by 2.
December 31, placed in service on March 16 an item of
If the result of (3) gives you a midpoint of a quarter that is 5-year property with a basis of $1,000. This is the only
on a day other than the first day or midpoint of a month, property the corporation placed in service during the short
treat the property as placed in service or disposed of on the tax year. Tara does not elect to claim a section 179 deduc-
nearest preceding first day or midpoint of that month. tion and the property does not qualify for a special depreci-
ation allowance. The depreciation method for this property
Example. Tara Corporation, a calendar year taxpayer, is the 200% declining balance method. The depreciation
was incorporated and began business on March 15. It has rate is 40% and Tara applies the half-year convention.
a short tax year of 91/2 months, ending on December 31. Tara treats the property as placed in service on August
During December, it placed property in service for which it 1. (The determination of this August 1 date is explained in
must use the mid-quarter convention. This is a short tax the example illustrating the half-year convention under
year of other than 4 or 8 full calendar months, so it must Using the Applicable Convention in a Short Tax Year,
determine the midpoint of each quarter. earlier.) Tara is allowed 5 months of depreciation for the
short tax year that consists of 10 months. The corporation
1. First, it determines that its short tax year beginning first multiplies the basis ($1,000) by 40% (the declining
March 15 and ending December 31 consists of 292 balance rate) to get the depreciation for a full tax year of
days. $400. The corporation then multiplies $400 by 5/12 to get the
2. Next, it divides 292 by 4 to determine the length of short tax year depreciation of $167.
each quarter, 73 days.
Example 2 —mid-quarter convention. Tara Corpora-
3. Finally, it divides 73 by 2 to determine the midpoint of tion, with a short tax year beginning March 15 and ending
each quarter, the 37th day. on December 31, placed in service on October 16 an item
The following table shows the quarters of Tara of 5-year property with a basis of $1,000. Tara does not
Corporation’s short tax year, the midpoint of each quarter, elect to claim a section 179 deduction and the property
and the date in each quarter that Tara must treat its does not qualify for a special depreciation allowance. The
property as placed in service. depreciation method for this property is the 200% declining
balance method. The depreciation rate is 40%. The corpo-
ration must apply the mid-quarter convention because the
Quarter Midpoint Placed in Service property was the only item placed in service that year and it
3/15 – 5/26 4/20 4/15 was placed in service in the last 3 months of the tax year.
Tara treats the property as placed in service on Septem-
5/27 – 8/07 7/02 7/01
ber 1. (This date is shown in the table provided in the
8/08 – 10/19 9/13 9/01 example illustrating the mid-quarter convention under Us-
ing the Applicable Convention in a Short Tax Year, earlier,
10/20 – 12/31 11/25 11/15
for property that Tara Corporation placed in service during
the quarter that begins on August 8 and ends on October
The last quarter of the short tax year begins on October
19.) Under MACRS, Tara is allowed 4 months of deprecia-
20, which is 73 days from December 31, the end of the tax
tion for the short tax year that consists of 10 months. The
year. The 37th day of the last quarter is November 25,
corporation first multiplies the basis ($1,000) by 40% to get
which is the midpoint of the quarter. November 25 is not
the depreciation for a full tax year of $400. The corporation
the first day or the midpoint of November, so Tara Corpora-
then multiplies $400 by 4/12 to get the short tax year depre-
tion must treat the property as placed in service in the
ciation of $133.
middle of November (the nearest preceding first day or
midpoint of that month).
Property Placed in Service Before a Short
Property Placed in Service in a Short Tax Year
Tax Year If you have a short tax year after the tax year in which you
began depreciating property, you must change the way
To figure your MACRS depreciation deduction for the short
you figure depreciation for that property. If you were using
tax year, you must first determine the depreciation for a full
the percentage tables, you can no longer use them. You
tax year. You do this by multiplying your basis in the
must figure depreciation for the short tax year and each
property by the applicable depreciation rate. Then, deter-
later tax year as explained next.
mine the depreciation for the short tax year. Do this by
multiplying the depreciation for a full tax year by a fraction.
The numerator (top number) of the fraction is the number Depreciation After a Short Tax Year
of months (including parts of a month) the property is
treated as in service during the tax year (applying the You can use either of the following methods to figure the
applicable convention). The denominator (bottom number) depreciation for years after a short tax year.

• The simplified method. • $233 —The depreciation for the first recovery year
($400 × 7/12).
• The allocation method.
You must use the method you choose consistently.
• $100 —The depreciation for the second recovery
year. This is figured by multiplying the adjusted basis
of $600 ($1,000 − $400) by 40%, then multiplying
Using the simplified method for a 12-month year.
the $240 result by 5/12.
Under the simplified method, you figure the depreciation
for a later 12-month year in the recovery period by multiply-
ing the adjusted basis of your property at the beginning of Using the allocation method for an early disposition. If
the year by the applicable depreciation rate. you dispose of property before the end of the recovery
period in a later tax year, determine the depreciation for the
Example. Assume the same facts as in Example 1 year of disposition by multiplying the depreciation figured
under Property Placed in Service in a Short Tax Year, for each recovery year or part of a recovery year included
earlier. The Tara Corporation claimed depreciation of $167 in the tax year by a fraction. The numerator of the fraction
for its short tax year. The adjusted basis on January 1 of is the number of months (including parts of months) the
the next year is $833 ($1,000 − $167). Tara’s depreciation property is treated as in service in the tax year (applying
for that next year is 40% of $833, or $333. the applicable convention). The denominator is 12. If there
is more than one recovery year in the tax year, you add
Using the simplified method for a short year. If a later together the depreciation for each recovery year.
tax year in the recovery period is a short tax year, you
figure depreciation for that year by multiplying the adjusted
basis of the property at the beginning of the tax year by the
applicable depreciation rate, and then by a fraction. The How Do You Use General
fraction’s numerator is the number of months (including
parts of a month) in the tax year. Its denominator is 12.
Asset Accounts?
Using the simplified method for an early disposition. If
you dispose of property in a later tax year before the end of (see Glossary):
the recovery period, determine the depreciation for the
year of disposition by multiplying the adjusted basis of the Adjusted basis
property at the beginning of the tax year by the applicable
depreciation rate and then multiplying the result by a frac- Amortization
tion. The fraction’s numerator is the number of months Amount realized
(including parts of a month) the property is treated as in
service during the tax year (applying the applicable con- Basis
vention). Its denominator is 12. Clean-fuel vehicle
Using the allocation method for a 12-month or short Clean-fuel vehicle refueling property
tax year. Under the allocation method, you figure the Convention
depreciation for each later tax year by allocating to that
Disposition
year the depreciation attributable to the parts of the recov-
ery years that fall within that year. Whether your tax year is Exchange
a 12-month or short tax year, you figure the depreciation by
Placed in service
determining which recovery years are included in that year.
For each recovery year included, multiply the depreciation Recovery period
attributable to that recovery year by a fraction. The
fraction’s numerator is the number of months (including
parts of a month) that are included in both the tax year and Unadjusted basis
the recovery year. Its denominator is 12. The allowable
depreciation for the tax year is the sum of the depreciation
figured for each recovery year. To make it easier to figure MACRS depreciation, you can
group separate properties into one or more general asset
Example. Assume the same facts as in Example 1 accounts (GAAs). You then can depreciate all the proper-
under Property Placed in Service in a Short Tax Year, ties in each account as a single item of property.
earlier. The Tara Corporation’s first tax year after the short
tax year is a full year of 12 months, beginning January 1 Property you cannot include. You cannot include prop-
and ending December 31. The first recovery year for the erty in a GAA if you use it in both a personal activity and a
5-year property placed in service during the short tax year trade or business (or for the production of income) in the
extends from August 1 to July 31. Tara deducted 5 months year in which you first place it in service. If property you
of the first recovery year on its short-year tax return. Seven included in a GAA is later used in a personal activity, see
months of the first recovery year and 5 months of the Terminating GAA Treatment, later.
second recovery year fall within the next tax year. The
depreciation for the next tax year is $333, which is the sum Property generating foreign source income. For infor-
of the following. mation on the GAA treatment of property that generates

foreign source income, see sections 1.168(i)-1(f) and Passenger automobiles. To figure depreciation on pas-
1.168(i)-1T(f) of the regulations. senger automobiles in a GAA, apply the deduction limits
discussed in chapter 5 under Do the Passenger Automo-
Change in use. Special rules apply to figuring deprecia- bile Limits Apply. Multiply the amount determined using
tion for property in a GAA for which the use changes during these limits by the number of automobiles originally in-
the tax year. Examples include a change in use resulting in cluded in the account, reduced by the total number of
a shorter recovery period and/or more accelerated depre- automobiles removed from the GAA as discussed in Ter-
ciation method or a change in use resulting in a longer minating GAA Treatment, later.
recovery period and/or a less accelerated depreciation
method. See sections 1.168(i)-1(h) and 1.168(i)-4 of the
regulations.
Disposing of GAA Property
When you dispose of property included in a GAA, the
Grouping Property following rules generally apply.
Each GAA must include only property you placed in serv- • Neither the unadjusted depreciable basis (defined
ice in the same year and that has the following in common. later) nor the depreciation reserve account of the
GAA is affected. You continue to depreciate the ac-
• Asset class, if any. count as if the disposition had not occurred.
• Recovery period. • The property is treated as having an adjusted basis
• Depreciation method. of zero, so you cannot realize a loss on the disposi-
tion. If the property is transferred to a supplies,
• Convention. scrap, or similar account, its basis in that account is
zero.
The following rules also apply when you establish a
GAA. • Any amount realized on the disposition is treated as
ordinary income, up to the limit discussed later under
• No asset class. Properties without an asset class, Treatment of amount realized .
but with the same depreciation method, recovery
period, and convention, can be grouped into the However, these rules do not apply to any disposition
same GAA. described later under Terminating GAA Treatment.
• Mid-quarter convention. Property subject to the Disposition. Property in a GAA is considered disposed of
mid-quarter convention can only be grouped into a when you do any of the following.
GAA with property placed in service in the same
quarter of the tax year. • Permanently withdraw it from use in your trade or
business or from the production of income.
• Mid-month convention. Property subject to the
mid-month convention can only be grouped into a • Transfer it to a supplies, scrap, or similar account.
GAA with property placed in service in the same • Sell, exchange, retire, physically abandon, or de-
month of the tax year. stroy it.
• Passenger automobiles. Passenger automobiles The retirement of a structural component of real property is
subject to the limits on passenger automobile depre- not a disposition.
ciation must be grouped into a separate GAA.
Treatment of amount realized. When you dispose of
property in a GAA, you must recognize any amount real-
Figuring Depreciation for a GAA ized from the disposition as ordinary income, up to a limit.
The limit is:
After you have set up a GAA, you generally figure the
MACRS depreciation for it by using the applicable depreci- 1. The unadjusted depreciable basis of the GAA plus
ation method, recovery period, and convention for the
2. Any expensed costs for property in the GAA that are
property in the GAA. For each GAA, record the deprecia-
subject to recapture as depreciation (not including
tion allowance in a separate depreciation reserve account.
any expensed costs for property that you removed
from the GAA under the rules discussed later under
Example. Make & Sell, a calendar-year corporation, set
Terminating GAA Treatment), minus
up a GAA for ten machines. The machines cost a total of
$10,000 and were placed in service in June 2005. One of 3. Any amount previously recognized as ordinary in-
the machines cost $8,200 and the rest cost a total of come upon the disposition of other property from the
$1,800. This GAA is depreciated under the 200% declining GAA.
balance method with a 5-year recovery period and a
half-year convention. Make & Sell did not claim the section Unadjusted depreciable basis. The unadjusted
179 deduction on the machines and the machines did not depreciable basis of a GAA is the total of the unadjusted
qualify for a special depreciation allowance. The deprecia- depreciable bases of all the property in the GAA. The
tion allowance for 2005 is $2,000 [($10,000 × 40%) ÷ 2]. As unadjusted depreciable basis of an item of property in a
of January 1, 2006, the depreciation reserve account is GAA is the amount you would use to figure gain or loss on
$2,000. its sale, but figured without reducing your original basis by

any depreciation allowed or allowable in earlier years. • Property you dispose of in a qualifying disposition or
However, you do reduce your original basis by other in a disposition of all the property in the GAA, if you
amounts, including any amortization deduction, section choose to terminate GAA treatment.
179 deduction, special depreciation allowance, deduction
for a clean-fuel vehicle or clean-fuel vehicle refueling prop-
• Property you dispose of in a like-kind exchange or
an involuntary conversion.
erty placed in service before January 1, 2006, and electric
vehicle credit. • Property you change to personal use.
Expensed costs. Expensed costs that are subject to • Property for which you must recapture any allowable
recapture as depreciation include the following. credit or deduction, such as the investment credit,
the credit for qualified electric vehicles, the section
1. The section 179 deduction. 179 deduction, or the deduction for clean-fuel vehi-
cles and clean-fuel vehicle refueling property placed
2. The deduction for clean-fuel vehicles or clean-fuel
in service before January 1, 2006.
vehicle refueling property placed in service before
January 1, 2006.
If you remove property from a GAA, you must make the
3. Amortization deductions for the following. following adjustments.
a. Pollution control facilities. 1. Reduce the unadjusted depreciable basis of the GAA
b. Removal of barriers for the elderly and disabled. by the unadjusted depreciable basis of the property
as of the first day of the tax year in which the disposi-
c. Tertiary injectants. tion, change in use, or recapture event occurs. (You
d. Reforestation expenses. can use any reasonable method that is consistently
applied to determine the unadjusted depreciable ba-
sis of the property you remove from a GAA.)
Example 1. The facts are the same as in the example 2. Reduce the depreciation reserve account by the de-
under Figuring Depreciation for a GAA, earlier. In February preciation allowed or allowable for the property (com-
2006, Make & Sell sells the machine that cost $8,200 to an puted in the same way as computed for the GAA) as
unrelated person for $9,000. The machine is treated as of the end of the tax year immediately preceding the
having an adjusted basis of zero. year in which the disposition, change in use, or re-
On its 2006 tax return, Make & Sell recognizes the capture event occurs.
$9,000 amount realized as ordinary income because it is
These adjustments have no effect on the recognition and
not more than the GAA’s unadjusted depreciable basis
character of prior dispositions subject to the rules dis-
($10,000) plus any expensed cost (for example, the sec-
cussed earlier under Disposing of GAA Property.
tion 179 deduction) for property in the GAA ($0), minus any
amounts previously recognized as ordinary income be- Nonrecognition transactions. If you dispose of GAA
cause of dispositions of other property from the GAA ($0). property in a nonrecognition transaction, you must remove
The unadjusted depreciable basis and depreciation re- it from the GAA. The following are nonrecognition transac-
serve of the GAA are not affected by the sale of the tions.
machine. The depreciation allowance for the GAA in 2006
is $3,200 [($10,000 − $2,000) × 40%]. • The receipt by one corporation of property distrib-
uted in complete liquidation of another corporation.
Example 2. Assume the same facts as in Example 1. In • The transfer of property to a corporation solely in
June 2007, Make & Sell sells seven machines to an unre- exchange for stock in that corporation if the trans-
lated person for a total of $1,100. These machines are feror is in control of the corporation immediately after
treated as having an adjusted basis of zero. the exchange.
On its 2007 tax return, Make & Sell recognizes $1,000
as ordinary income. This is the GAA’s unadjusted depre- • The transfer of property by a corporation that is a
ciable basis ($10,000) plus the expensed costs ($0), minus party to a reorganization in exchange solely for stock
the amount previously recognized as ordinary income and securities in another corporation that is also a
($9,000). The remaining amount realized of $100 ($1,100 party to the reorganization.
− $1,000) is section 1231 gain (discussed in chapter 3 of • The contribution of property to a partnership in ex-
Publication 544). change for an interest in the partnership.
The unadjusted depreciable basis and depreciation re- • The distribution of property (including money) from a
serve of the GAA are not affected by the disposition of the partnership to a partner.
machines. The depreciation allowance for the GAA in 2007
is $1,920 [($10,000 − $5,200) × 40%]. • Any transaction between members of the same affili-
ated group during any year for which the group
makes a consolidated return.
Terminating GAA Treatment
You must remove the following property from a GAA. Rules for recipient (transferee). The recipient of the
property (the person to whom it is transferred) must include
• Property you dispose of in a nonrecognition transac- your (the transferor’s) adjusted basis in the property in a
tion or an abusive transaction. GAA. If you transferred either all of the property or the last

item of property in a GAA, the recipient’s basis in the b. The total gain previously recognized as ordinary
property is the result of the following. income on the disposition of property from the
GAA.
• The adjusted depreciable basis of the GAA as of the
beginning of your tax year in which the transaction
takes place, minus Qualifying dispositions. If you dispose of GAA property
• The depreciation allowable to you for the year of the in a qualifying disposition, you can choose to remove the
transfer. property from the GAA. A qualifying disposition is one that
does not involve all the property, or the last item of prop-
For this purpose, the adjusted depreciable basis of a erty, remaining in a GAA and that is described by any of the
GAA is the unadjusted depreciable basis of the GAA minus following.
any depreciation allowed or allowable for the GAA.
1. A disposition that is a direct result of fire, storm,
Abusive transactions. If you dispose of GAA property in shipwreck, other casualty, or theft.
an abusive transaction, you must remove it from the GAA.
2. A charitable contribution for which a deduction is
A disposition is an abusive transaction if it is not a nonrec-
allowed.
ognition transaction (described earlier) or a like-kind ex-
change or involuntary conversion and a main purpose for 3. A disposition that is a direct result of a cessation,
the disposition is to get a tax benefit or a result that would termination, or disposition of a business, manufactur-
not be available without the use of a GAA. Examples of ing or other income-producing process, operation,
abusive transactions include the following. facility, plant, or other unit (other than by transfer to a
supplies, scrap, or similar account).
1. A transaction with a main purpose of shifting income
or deductions among taxpayers in a way that would 4. A nontaxable transaction other than a nonrecognition
not be possible without choosing to use a GAA to transaction (described earlier), a like-kind exchange
take advantage of differing effective tax rates. or involuntary conversion, or a transaction that is
nontaxable only because it is a disposition from a
2. A choice to use a GAA with a main purpose of GAA.
disposing of property from the GAA so that you can
use an expiring net operating loss or credit. For ex- If you choose to remove the property from the GAA,
ample, if you have a net operating loss carryover or a figure your gain, loss, or other deduction resulting from the
credit carryover, the following transactions will be disposition in the manner described earlier under Abusive
considered abusive transactions unless there is transactions.
strong evidence to the contrary.
Like-kind exchanges and involuntary conversions. If
a. A transfer of GAA property to a related person. you dispose of GAA property as a result of a like-kind
exchange or involuntary conversion, you must remove
b. A transfer of GAA property under an agreement from the GAA the property that you transferred. See chap-
where the property continues to be used, or is ter 1 of Publication 544 for information on these transac-
available for use, by you. tions. Figure your gain, loss, or other deduction resulting
from the disposition in the manner described earlier under
Figuring gain or loss. You must determine the gain, Abusive transactions.
loss, or other deduction due to an abusive transaction by
taking into account the property’s adjusted basis. The Example. Sankofa, a calendar-year corporation, main-
adjusted basis of the property at the time of the disposition tains one GAA for 12 machines. Each machine costs
is the result of the following: $15,000 and was placed in service in 2005. Of the 12
machines, nine cost a total of $135,000 and are used in
• The unadjusted depreciable basis of the property, Sankofa’s New York plant and three machines cost
minus $45,000 and are used in Sankofa’s New Jersey plant.
• The depreciation allowed or allowable for the prop- Assume this GAA uses the 200% declining balance depre-
erty figured by using the depreciation method, recov- ciation method, a 5-year recovery period, and a half-year
ery period, and convention that applied to the GAA convention. Sankofa does not claim the section 179 de-
in which the property was included. duction and the machines do not qualify for a special
depreciation allowance. As of January 1, 2007, the depre-
If there is a gain, the amount subject to recapture as ciation reserve account for the GAA is $93,600.
ordinary income is the smaller of the following. In May 2007, Sankofa sells its entire manufacturing
plant in New Jersey to an unrelated person. The sales
1. The depreciation allowed or allowable for the prop- proceeds allocated to each of the three machines at the
erty, including any expensed cost (such as section New Jersey plant is $5,000. This transaction is a qualifying
179 deductions or the additional depreciation allowed disposition, so Sankofa chooses to remove the three ma-
or allowable for the property). chines from the GAA and figure the gain, loss, or other
2. The result of the following: deduction by taking into account their adjusted bases.
For Sankofa’s 2007 return, the depreciation allowance
a. The original unadjusted depreciable basis of the for the GAA is figured as follows. As of December 31,
GAA (plus, for section 1245 property originally 2006, the depreciation allowed or allowable for the three
included in the GAA, any expensed cost), minus machines at the New Jersey plant is $23,400. As of Janu-

ary 1, 2007, the unadjusted depreciable basis of the GAA Therefore, the entire gain of $11,960 is recaptured as
is reduced from $180,000 to $135,000 ($180,000 minus ordinary income.
the $45,000 unadjusted depreciable bases of the three
machines), and the depreciation reserve account is de- Electing To Use a GAA
creased from $93,600 to $70,200 ($93,600 minus $23,400
depreciation allowed or allowable for the three machines An election to include property in a GAA is made sepa-
as of December 31, 2006.) The depreciation allowance for rately by each owner of the property. This means that an
the GAA in 2007 is $25,920 [($135,000 − $70,200) × 40%]. election to include property in a GAA must be made by
For Sankofa’s 2007 return, gain or loss for each of the each member of a consolidated group and at the partner-
three machines at the New Jersey plant is determined as ship or S corporation level (and not by each partner or
follows. The depreciation allowed or allowable in 2007 for shareholder separately).
each machine is $1,440 [(($15,000 − $7,800) × 40%) ÷ 2].
How to make the election. Make the election by complet-
The adjusted basis of each machine is $5,760 (the ad-
ing line 18 of Form 4562.
justed depreciable basis of $7,200 removed from the ac-
count less the $1,440 depreciation allowed or allowable in When to make the election. You must make the election
2007). As a result, the loss recognized in 2007 for each on a timely filed tax return (including extensions) for the
machine is $760 ($5,000 − $5,760). This loss is subject to year in which you place in service the property included in
section 1231 treatment. See chapter 3 of Publication 544 the GAA. However, if you timely filed your return for the
for information on section 1231 losses. year without making the election, you still can make the
election by filing an amended return within 6 months of the
Disposition of all property in a GAA. If you dispose of all due date of the return (excluding extensions). Attach the
the property, or the last item of property, in a GAA, you can election to the amended return and write “Filed pursuant to
choose to end the GAA. If you make this choice, you figure section 301.9100-2” on the election statement.
the gain or loss by comparing the adjusted depreciable
basis of the GAA with the amount realized. You must maintain records that identify the prop-
If there is a gain, the amount subject to recapture as erty included in each GAA, that establish the
ordinary income is limited to the result of the following.
RECORDS unadjusted depreciable basis and depreciation
reserve of the GAA, and that reflect the amount realized
• The depreciation allowed or allowable for the GAA, during the year upon dispositions from each GAA. How-
including any expensed cost (such as section 179 ever, see chapter 2 for the recordkeeping requirements for
deductions or the additional depreciation allowed or section 179 property.
allowable for the GAA), minus Revoking an election. You can revoke an election to use
• The total gain previously recognized as ordinary in- a GAA only in the following situations.
come on the disposition of property from the GAA. • You include in the GAA property that generates for-
eign source income, both United States and foreign
Like-kind exchanges and involuntary conversions. source income, or combined gross income of an
If you dispose of all the property or the last item of property FSC, a DISC, or a possessions corporation and its
in a GAA as a result of a like-kind exchange or involuntary related supplier, and that inclusion results in a sub-
conversion, the GAA terminates. You must figure the gain stantial distortion of income.
or loss in the manner described above under Disposition of
all property in a GAA. • You remove property from the GAA as described
under Terminating GAA Treatment, earlier.
Example. Duforcelf, a calendar-year corporation, main-
tains a GAA for 1,000 calculators that cost a total of
$60,000 and were placed in service in 2005. Assume this
GAA is depreciated under the 200% declining balance When Do You Recapture
method, has a recovery period of 5 years, and uses a
half-year convention. Duforcelf does not claim the section MACRS Depreciation?
179 deduction and the calculators do not qualify for a Terms you may need to know
special depreciation allowance. In 2006, Duforcelf sells
200 of the calculators to an unrelated person for $10,000. (see Glossary):
The $10,000 is recognized as ordinary income.
In March 2007, Duforcelf sells the remaining calculators Clean-fuel vehicle
in the GAA to an unrelated person for $35,000. Duforcelf Clean-fuel vehicle refueling property
decides to end the GAA.
On the date of the disposition, the adjusted depreciable Disposition
basis of the account is $23,040 (unadjusted depreciable Nonresidential real property
basis of $60,000 minus the depreciation allowed or allowa-
ble of $36,960). In 2007, Duforcelf recognizes a gain of Recapture
$11,960. This is the amount realized of $35,000 minus the Residential rental property
adjusted depreciable basis of $23,040. The gain subject to
recapture as ordinary income is limited to the depreciation
allowed or allowable minus the amounts previously recog- When you dispose of property that you depreciated using
nized as ordinary income ($36,960 − $10,000 = $26,960). MACRS, any gain on the disposition generally is recap-

tured (included in income) as ordinary income up to the under the Modified Accelerated Cost Recovery Sys-
amount of the depreciation previously allowed or allowable tem (MACRS) using the straight line method over
for the property. Depreciation, for this purpose, includes the ADS recovery period. You may also have to
the following. recapture (include in income) any excess deprecia-
• Any section 179 deduction claimed on the property. tion claimed in previous years. A similar inclusion
amount applies to certain leased property.
• Any deduction under section 179B of the Internal
Revenue Code for capital costs to comply with Envi- • Passenger automobile limits and rules. Annual
ronmental Protection Agency sulfur regulations. limits apply to depreciation deductions (including
section 179 deductions) for certain passenger auto-
• Any deduction under section 179C of the Internal mobiles. You can continue to deduct depreciation for
Revenue Code for certain qualified refinery property the unrecovered basis resulting from these limits af-
placed in service after August 8, 2005. ter the end of the recovery period.
• Any deduction under section 190 of the Internal Rev-
enue Code for removal of barriers to the disabled This chapter defines listed property and explains the
and the elderly. special rules and depreciation deduction limits that apply,
including the special inclusion amount rule for leased prop-
• Any deduction under section 193 of the Internal Rev- erty. It also discusses the recordkeeping rules for listed
enue Code for tertiary injectants.
property and explains how to report information about the
• Any special depreciation allowance previously al- property on your tax return.
lowed or allowable for the property (unless you
elected not to claim it). For information on the limits on depreciation
• Any deduction claimed for clean-fuel vehicles and

!
CAUTION
deductions for listed property placed in service
before 1987, see Publication 534.
clean-fuel vehicle refueling property placed in serv-
ice before January 1, 2006.
There is no recapture for residential rental and nonresiden- Useful Items
tial real property unless that property is qualified property You may want to see:
for which you claimed a special depreciation allowance.
For more information on depreciation recapture, see Publi- Publication
cation 544.
❏ 463 Travel, Entertainment, Gift, and Car
Expenses
❏ 535 Business Expenses
❏ 587 Business Use of Your Home (Including Use
5. by Daycare Providers)
Form (and Instructions)

Additional Rules for ❏ 2106 Employee Business Expenses
Listed Property ❏ 2106-EZ Unreimbursed Employee Business
Expenses
❏ 4562 Depreciation and Amortization
Introduction
❏ 4797 Sales of Business Property
This chapter discusses the deduction limits and other spe-
cial rules that apply to certain listed property. Listed prop- See chapter 6 for information about getting publications
erty includes cars and other property used for and forms.
transportation, property used for entertainment, and cer-
tain computers and cellular phones.
Deductions for listed property (other than certain leased
property) are subject to the following special rules and
What Is Listed Property?
limits. Terms you may need to know
• Deduction for employees. If your use of the prop- (see Glossary):
erty is not for your employer’s convenience or is not
required as a condition of your employment, you Capitalized
cannot deduct depreciation or rent expenses for your
use of the property as an employee. Commuting
• Business-use requirement. If the property is not Improvement
used predominantly (more than 50%) for qualified Recovery period
business use, you cannot claim the section 179 de-
duction or a special depreciation allowance. In addi- Straight line method
tion, you must figure any depreciation deduction
Chapter 5 Additional Rules for Listed Property Page 53

Listed property is any of the following. Although vehicles used to transport persons or
• Passenger automobiles weighing 6,000 pounds or
!
CAUTION
property for pay or hire and vehicles rated at
more than the 6,000-pound threshold are not
less. passenger automobiles, they are still “other property used
• Any other property used for transportation, unless it for transportation” (discussed next). They are therefore
is an excepted vehicle. listed property items subject to the special rules for such
property other than the passenger automobile limits and
• Property generally used for entertainment, recrea- rules.
tion, or amusement (including photographic, phono- For a detailed discussion of passenger automobiles,
graphic, communication, and video-recording including leased passenger automobiles, see Publication
equipment). 463.
• Computers and related peripheral equipment, unless
used only at a regular business establishment and Other Property Used
owned or leased by the person operating the estab- for Transportation
lishment. A regular business establishment includes
a portion of a dwelling unit that is used both regularly Other property used for transportation includes trucks,
and exclusively for business as discussed in Publi- buses, boats, airplanes, motorcycles, and any other vehi-
cation 587. cles used to transport persons or goods.
• Cellular telephones (or similar telecommunication Excepted vehicles. Other property used for transporta-
equipment). tion does not include the following qualified nonpersonal
use vehicles (defined earlier under Passenger Automo-
Improvements to listed property. An improvement biles).
made to listed property that must be capitalized is treated
as a new item of depreciable property. The recovery period • Clearly marked police and fire vehicles.
and method of depreciation that apply to the listed property • Unmarked vehicles used by law enforcement officers
as a whole also apply to the improvement. For example, if if the use is officially authorized.
you must depreciate the listed property using the straight • Ambulances used as such and hearses used as
line method, you also must depreciate the improvement such.
using the straight line method.
• Any vehicle with a loaded gross vehicle weight of
over 14,000 pounds that is designed to carry cargo.
Passenger Automobiles
• Bucket trucks (cherry pickers), cement mixers, dump
A passenger automobile is any four-wheeled vehicle made trucks (including garbage trucks), flatbed trucks, and
primarily for use on public streets, roads, and highways refrigerated trucks.
and rated at 6,000 pounds or less of unloaded gross
vehicle weight (6,000 pounds or less of gross vehicle
• Combines, cranes and derricks, and forklifts.
weight for trucks and vans). It includes any part, compo- • Delivery trucks with seating only for the driver, or
nent, or other item physically attached to the automobile or only for the driver plus a folding jump seat.
usually included in the purchase price of an automobile. • Qualified moving vans.
The following vehicles are not considered passenger
automobiles for these purposes. • Qualified specialized utility repair trucks.
• School buses used in transporting students and em-
• An ambulance, hearse, or combination ployees of schools.
ambulance-hearse used directly in a trade or busi-
ness. • Other buses with a capacity of at least 20 passen-
gers that are used as passenger buses.
• A vehicle used directly in the trade or business of
transporting persons or property for pay or hire. • Tractors and other special purpose farm vehicles.
• A truck or van that is a qualified nonpersonal use Clearly marked police and fire vehicle. A clearly
vehicle. marked police or fire vehicle is a vehicle that meets all the
following requirements.
Qualified nonpersonal use vehicles. Qualified nonper- • It is owned or leased by a governmental unit or an
sonal use vehicles are vehicles that by their nature are not agency or instrumentality of a governmental unit.
likely to be used more than a minimal amount for personal
purposes. They include the trucks and vans listed as ex- • It is required to be used for commuting by a police
cepted vehicles under Other Property Used for Transpor- officer or fire fighter who, when not on a regular shift,
tation, next. They also include trucks and vans that have is on call at all times.
been specially modified so that they are not likely to be • It is prohibited from being used for personal use
used more than a minimal amount for personal purposes, (other than commuting) outside the limit of the police
such as by installation of permanent shelving and painting officer’s arrest powers or the fire fighter’s obligation
the vehicle to display advertising or the company’s name. to respond to an emergency.
Page 54 Chapter 5 Additional Rules for Listed Property

• It is clearly marked with painted insignia or words • Equipment of a kind used primarily for the user’s
that make it readily apparent that it is a police or fire amusement or entertainment, such as video games.
vehicle. A marking on a license plate is not a clear
marking for these purposes.
Qualified moving van. A qualified moving van is any Can Employees Claim
truck or van used by a professional moving company for
moving household or business goods if the following re- a Deduction?
quirements are met.
If you are an employee, you can claim a depreciation
• No personal use of the van is allowed other than for deduction for the use of your listed property (whether
travel to and from a move site or for minor personal owned or rented) in performing services as an employee
use, such as a stop for lunch on the way from one only if your use is a business use. The use of your property
move site to another. in performing services as an employee is a business use
only if both the following requirements are met.
• Personal use for travel to and from a move site
happens no more than five times a month on aver- • The use is for your employer’s convenience.
age. • The use is required as a condition of your employ-
• Personal use is limited to situations in which it is ment.
more convenient to the employer, because of the
location of the employee’s residence in relation to If these requirements are not met, you cannot deduct
the location of the move site, for the van not to be depreciation (including the section 179 deduction) or rent
returned to the employer’s business location. expenses for your use of the property as an employee.
Qualified specialized utility repair truck. A truck is a Employer’s convenience. Whether the use of listed
qualified specialized utility repair truck if it is not a van or property is for your employer’s convenience must be deter-
pickup truck and all the following apply. mined from all the facts. The use is for your employer’s
convenience if it is for a substantial business reason of the
• The truck was specifically designed for and is used employer. The use of listed property during your regular
to carry heavy tools, testing equipment, or parts. working hours to carry on your employer’s business gener-
• Shelves, racks, or other permanent interior construc- ally is for the employer’s convenience.
tion has been installed to carry and store the tools,
equipment, or parts and would make it unlikely that Condition of employment. Whether the use of listed
the truck would be used, other than minimally, for property is a condition of your employment depends on all
personal purposes. the facts and circumstances. The use of property must be
• The employer requires the employee to drive the required for you to perform your duties properly. Your
truck home in order to be able to respond in emer- employer does not have to require explicitly that you use
gency situations for purposes of restoring or main- the property. However, a mere statement by the employer
taining electricity, gas, telephone, water, sewer, or that the use of the property is a condition of your employ-
steam utility services. ment is not sufficient.
Example 1. Virginia Sycamore is employed as a courier

with We Deliver, which provides local courier services. She
Computers and Related owns and uses a motorcycle to deliver packages to down-
Peripheral Equipment town offices. We Deliver explicitly requires all delivery
persons to own a car or motorcycle for use in their employ-
A computer is a programmable, electronically activated ment. Virginia’s use of the motorcycle is for the conve-
device capable of accepting information, applying pre- nience of We Deliver and is required as a condition of
scribed processes to the information, and supplying the employment.
results of those processes with or without human interven-
tion. It consists of a central processing unit with extensive Example 2. Bill Nelson is an inspector for Uplift, a
storage, logic, arithmetic, and control capabilities. construction company with many sites in the local area. He
Related peripheral equipment is any auxiliary machine must travel to these sites on a regular basis. Uplift does not
which is designed to be controlled by the central process- furnish an automobile or explicitly require him to use his
ing unit of a computer. own automobile. However, it pays him for any costs he
incurs in traveling to the various sites. The use of his own
The following are neither computers nor related periph- automobile or a rental automobile is for the convenience of
eral equipment. Uplift and is required as a condition of employment.
• Any equipment that is an integral part of other prop- Example 3. Assume the same facts as in Example 2
erty that is not a computer.
except that Uplift furnishes a car to Bill, who chooses to
• Typewriters, calculators, adding and accounting ma- use his own car and receive payment for using it. The use
chines, copiers, duplicating equipment, and similar of his own car is neither for the convenience of Uplift nor
equipment. required as a condition of employment.

Example 4. Marilyn Lee is a pilot for Y Company, a straight line method over the ADS recovery period.
small charter airline. Y requires pilots to obtain 80 hours of This rule applies each year of the recovery period.
flight time annually in addition to flight time spent with the
airline. Pilots usually can obtain these hours by flying with
• Excess depreciation on property previously used
predominantly for qualified business use must be
the Air Force Reserve or by flying part-time with another
recaptured (included in income) in the first year in
airline. Marilyn owns her own airplane. The use of her
which it is no longer used predominantly for qualified
airplane to obtain the required flight hours is neither for the
business use.
convenience of the employer nor required as a condition of
employment. • A lessee must add an inclusion amount to income in
the first year in which the leased property is not used
Example 5. David Rule is employed as an engineer predominantly for qualified business use.
with Zip, an engineering contracting firm. He occasionally
takes work home at night rather than work late in the office.
Being required to use the straight line method for
He owns and uses a home computer which is virtually
identical to the office model. His use of the computer is !
CAUTION
an item of listed property not used predominantly
for qualified business use is not the same as
neither for the convenience of his employer nor required as
electing the straight line method. It does not mean that you
a condition of employment.
have to use the straight line method for other property in
the same class as the item of listed property.
What Is the Business-Use Exception for leased property. The business-use re-
quirement generally does not apply to any listed property
Requirement? leased or held for leasing by anyone regularly engaged in
the business of leasing listed property.
Terms you may need to know You are considered regularly engaged in the business
(see Glossary): of leasing listed property only if you enter into contracts for
the leasing of listed property with some frequency over a
continuous period of time. This determination is made on
Adjusted basis the basis of the facts and circumstances in each case and
Business/investment use takes into account the nature of your business in its en-
tirety. Occasional or incidental leasing activity is insuffi-
Capitalized cient. For example, if you lease only one passenger
Commuting automobile during a tax year, you are not regularly en-
gaged in the business of leasing automobiles. An employer
Declining balance method who allows an employee to use the employer’s property for
Fair market value (FMV) personal purposes and charges the employee for the use
is not regularly engaged in the business of leasing the
Nonresidential real property property used by the employee.
Placed in service
Recapture How To Allocate Use
Recovery period To determine whether the business-use requirement is
met, you must allocate the use of any item of listed prop-
Straight line method erty used for more than one purpose during the year
among its various uses.
You can claim the section 179 deduction and a special For passenger automobiles and other means of trans-
depreciation allowance for listed property and depreciate portation, allocate the property’s use on the basis of mile-
listed property using GDS and a declining balance method age. You determine the percentage of qualified business
if the property meets the business-use requirement. To use by dividing the number of miles you drove the vehicle
meet this requirement, listed property must be used for business purposes during the year by the total number
predominantly (more than 50% of its total use) for qualified of miles you drove the vehicle for all purposes (including
business use. If this requirement is not met, the following business miles) during the year.
rules apply. For other listed property, allocate the property’s use on
the basis of the most appropriate unit of time the property is
• Property not used predominantly for qualified busi- actually used (rather than merely being available for use).
ness use during the year it is placed in service does For example, you can determine the percentage of busi-
not qualify for the section 179 deduction. ness use of a computer by dividing the number of hours
you used the computer for business purposes during the
• Property not used predominantly for qualified busi- year by the total number of hours you used the computer
ness use during the year it is placed in service does for all purposes (including business use) during the year.
not qualify for a special depreciation allowance.
• Any depreciation deduction under MACRS for prop- Entertainment use. Treat the use of listed property for
erty not used predominantly for qualified business entertainment, recreation, or amusement purposes as a
use during any year must be figured using the business use only to the extent you can deduct expenses

(other than interest and property tax expenses) due to its 5% owner. For a business entity that is not a corporation,
use as an ordinary and necessary business expense. a 5% owner is any person who owns more than 5% of the
capital or profits interest in the business.
Commuting use. The use of an automobile for commut- For a corporation, a 5% owner is any person who owns,
ing is not business use, regardless of whether work is or is considered to own, either of the following.
performed during the trip. For example, a business tele-
phone call made on a car telephone while commuting to
• More than 5% of the outstanding stock of the corpo-
ration.
work does not change the character of the trip from com-
muting to business. This is also true for a business meeting • Stock possessing more than 5% of the total com-
held in a car while commuting to work. Similarly, a busi- bined voting power of all stock in the corporation.
ness call made on an otherwise personal trip does not
change the character of a trip from personal to business. Related persons. For a description of related persons,
The fact that an automobile is used to display material that see Related persons in the discussion on property owned
advertises the owner’s or user’s trade or business does not or used in 1986 under Can You Use MACRS To Depreci-
convert an otherwise personal use into business use. ate Your Property in chapter 1. For this purpose, however,
treat as related persons only the relationships listed in
Use of your automobile by another person. If someone items (1) through (10) of that discussion and substitute
else uses your automobile, do not treat that use as busi- “50%” for “10%” each place it appears.
ness use unless one of the following conditions applies.
Examples. The following examples illustrate whether the
1. That use is directly connected with your business. use of business property is qualified business use.
2. You properly report the value of the use as income to
the other person and withhold tax on the income Example 1. John Maple is the sole proprietor of a
where required. plumbing contracting business. John employs his brother,
Richard, in the business. As part of Richard’s pay, he is
3. You are paid a fair market rent. allowed to use one of the company automobiles for per-
Treat any payment to you for the use of the automobile as sonal use. The company includes the value of the personal
a rent payment for purposes of item (3). use of the automobile in Richard’s gross income and prop-
erly withholds tax on it. The use of the automobile is pay for
Employee deductions. If you are an employee, do not the performance of services by a related person, so it is not
treat your use of listed property as business use unless it is a qualified business use.
for your employer’s convenience and is required as a
condition of your employment. See Can Employees Claim Example 2. John, in Example 1, allows unrelated em-
a Deduction, earlier. ployees to use company automobiles for personal pur-
poses. He does not include the value of the personal use of
the company automobiles as part of their compensation
Qualified Business Use and he does not withhold tax on the value of the use of the
automobiles. This use of company automobiles by employ-
Qualified business use of listed property is any use of the
ees is not a qualified business use.
property in your trade or business. However, it does not
include the following uses.
Example 3. James Company Inc. owns several auto-
• The leasing of property to any 5% owner or related mobiles that its employees use for business purposes. The
person (to the extent the property is used by a 5% employees also are allowed to take the automobiles home
owner or person related to the owner or lessee of at night. The fair market value of each employee’s use of
the property). an automobile for any personal purpose, such as commut-
• The use of property as pay for the services of a 5% ing to and from work, is reported as income to the em-
owner or related person. ployee and James Company withholds tax on it. This use
of company automobiles by employees, even for personal
• The use of property as pay for services of any per- purposes, is a qualified business use for the company.
son (other than a 5% owner or related person), un-
less the value of the use is included in that person’s
gross income and income tax is withheld on that Investment Use
amount where required.
The use of property to produce income in a nonbusiness
activity (investment use) is not a qualified business use.
Property does not stop being used predomi- However, you can treat the investment use as business
!
CAUTION
nantly for qualified business use because of a
transfer at death.
use to figure the depreciation deduction for the property in
a given year.
Example 1. Sarah Bradley uses a home computer 50%

Exception for leasing or compensatory use of aircraft. of the time to manage her investments. She also uses the
Treat the leasing or compensatory use of any aircraft by a computer 40% of the time in her part-time consumer re-
5% owner or related person as a qualified business use if search business. Sarah’s home computer is listed property
at least 25% of the total use of the aircraft during the year is because it is not used at a regular business establishment.
for a qualified business use. She does not use the computer predominantly for qualified

business use. Therefore, she cannot elect a section 179 Total section 179 deduction ($10,000) and
deduction or claim a special depreciation allowance for the depreciation claimed ($6,618) for 2001 through
computer. She must depreciate it using the straight line 2004. (Depreciation is from Table A-1.) . . . . . . $16,618
method over the ADS recovery period. (Her combined Minus: Depreciation allowable (Table
business/investment use for determining her depreciation A-8):
deduction is 90%.) 2001 – 10% of $18,000 . . . . . . . . . . . . $1,800
2002 – 20% of $18,000 . . . . . . . . . . . . 3,600
2003 – 20% of $18,000 . . . . . . . . . . . . 3,600
Example 2. If Sarah uses her computer 30% of the time 2004 – 20% of $18,000 . . . . . . . . . . . . 3,600 12,600
to manage her investments and 60% of the time in her
consumer research business, it is used predominantly for Excess depreciation . . . . . . . . . . . . . . . . . . . . $4,018
qualified business use. She can elect a section 179 deduc- If Ellen’s use of the truck does not change to 50% for
tion and, if she does not deduct all the computer’s cost, she business and 50% for personal purposes until 2007, there
can claim a special depreciation allowance and depreciate will be no excess depreciation. The total depreciation al-
the computer using the 200% declining balance method lowable using Table A-8 through 2007 will be $18,000,
over the GDS recovery period. (Her combined business/ which equals the total of the section 179 deduction and
investment use for determining her depreciation deduction depreciation she will have claimed.
is 90%.)
Where to figure and report recapture. Use Form 4797,
Recapture of Excess Depreciation Part IV, to figure the recapture amount. Report the recap-
ture amount as other income on the same form or schedule
If you used listed property more than 50% in a qualified on which you took the depreciation deduction. For exam-
business use in the year you placed it in service, you must ple, report the recapture amount as other income on
recapture (include in income) excess depreciation in the Schedule C (Form 1040) if you took the depreciation de-
first year you use it 50% or less. You also increase the duction on Schedule C. If you took the depreciation deduc-
adjusted basis of your property by the same amount. tion on Form 2106, report the recapture amount as other
Excess depreciation is: income on Form 1040, line 21.
1. The depreciation allowable for the property (including
any section 179 deduction and special depreciation Lessee’s Inclusion Amount
allowance claimed) for years before the first year you
If you use leased listed property other than a passenger
do not use the property predominantly for qualified
automobile for business/investment use, you must include
business use, minus
an amount in your income in the first year your qualified
2. The depreciation that would have been allowable for business-use percentage is 50% or less. Your qualified
those years if you had not used the property business-use percentage is the part of the property’s total
predominantly for qualified business use in the year use that is qualified business use (defined earlier). For the
you placed it in service. inclusion amount rules for a leased passenger automobile,
see Leasing a Car in chapter 4 of Publication 463.
To determine the amount in (2) above, you must refigure
the depreciation using the straight line method and the The inclusion amount is the sum of Amount A and
ADS recovery period. Amount B, described next. However, see the special rules
for the inclusion amount, later, if your lease begins in the
Example. In June 2001, Ellen Rye purchased and last 9 months of your tax year or is for less than one year.
placed in service a pickup truck that cost $18,000. She
used it only for qualified business use for 2001 through Amount A. Amount A is:
2004. Ellen claimed a section 179 deduction of $10,000
based on the purchase of the truck. She began depreciat- 1. The fair market value of the property, multiplied by
ing it using the 200% DB method over a 5-year GDS 2. The business/investment use for the first tax year the
recovery period. (The pickup truck’s gross vehicle weight qualified business-use percentage is 50% or less,
was over 6,000 pounds, so it was not subject to the pas- multiplied by
senger automobile limits discussed later under Do the
Passenger Automobile Limits Apply.) During 2005, she 3. The applicable percentage from Table A-19 in Ap-
used the truck 50% for business and 50% for personal pendix A.
purposes. She includes $4,018 excess depreciation in her The fair market value of the property is the value on the
gross income for 2005. The excess depreciation is deter- first day of the lease term. If the capitalized cost of an item
mined as follows. of listed property is specified in the lease agreement, you
must treat that amount as the fair market value.
Amount B. Amount B is:
1. The fair market value of the property, multiplied by

2. The average of the business/investment use for all
tax years the property was leased that precede the
first tax year the qualified business-use percentage is
50% or less, multiplied by

3. The applicable percentage from Table A-20 in Ap- 6. Fair market value . . . . . . . . . . . . . . . . . . . 3,000
pendix A. 7. Average business/investment use for years
property leased before the first year
Maximum inclusion amount. The inclusion amount can- business use is 50% or less 70 %
not be more than the sum of the deductible amounts of rent 8. Multiply line 6 by line 7 . . . . . . . . . . . . . . . 2,100
for the tax year in which the lessee must include the 9. Rate (%) from Table A-20 . . . . . . . . . . . . . 22.0 %
amount in gross income. 10. Multiply line 8 by line 9. This is Amount B. 462
11. Add line 5 and line 10. This is your
Inclusion amount worksheet. The following worksheet inclusion amount. Enter here and as other
is provided to help you figure the inclusion amount for income on the form or schedule on which
leased listed property. you originally took the deduction (for
example, Schedule C or F (Form 1040),
Inclusion Amount Worksheet Form 1040, Form 1120, etc.) . . . . . . . . . . . $224
for Leased Listed Property
1. Fair market value . . . . . . . . . . . . . . . . . . . . . Lease beginning in the last 9 months of your tax year.
2. Business/investment use for first year The inclusion amount is subject to a special rule if all the
business use is 50% or less . . . . . . . . . . . . . following apply.
3. Multiply line 1 by line 2. . . . . . . . . . . . . . . . .
4. Rate (%) from Table A-19 . . . . . . . . . . . . . . • The lease term begins within 9 months before the
5. Multiply line 3 by line 4. This is Amount A. . . close of your tax year.
6. Fair market value . . . . . . . . . . . . . . . . . . . . . • You do not use the property predominantly (more
7. Average business/investment use for years than 50%) for qualified business use during that part
property leased before the first year of the tax year.
business use is 50% or less
8. Multiply line 6 by line 7 . . . . . . . . . . . . . . . . • The lease term continues into your next tax year.
9. Rate (%) from Table A-20 . . . . . . . . . . . . . . Under this special rule, add the inclusion amount to income
10. Multiply line 8 by line 9. This is Amount B. . . in the next tax year. Figure the inclusion amount by taking
11. Add line 5 and line 10. This is your inclusion into account the average of the business/investment use
amount. Enter here and as other income on for both tax years (line 2 of the Inclusion Amount Work-
the form or schedule on which you originally sheet for Leased Listed Property) and the applicable per-
took the deduction (for example, Schedule C centage for the tax year the lease term begins. (Skip lines 6
or F (Form 1040), Form 1040, Form 1120, through 9 of the worksheet and enter zero on line 10.)
etc.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Example 1. On August 1, 2004, Julie Rule, a calendar
year taxpayer, leased and placed in service an item of
Example. On February 1, 2003, Larry House, a calen- listed property. The property is 5-year property with a fair
dar year taxpayer, leased and placed in service a com- market value of $10,000. Her property has a recovery
puter with a fair market value of $3,000. The lease is for a period of 5 years under ADS. The lease is for 5 years. Her
period of 5 years. Larry does not use the computer at a business use of the property was 50% in 2004 and 90% in
regular business establishment, so it is listed property. His 2005. She paid rent of $3,600 for 2005, of which $3,240 is
business use of the property (all of which is qualified deductible. She must include $147 in income in 2005. The
business use) is 80% in 2003, 60% in 2004, and 40% in $147 is the sum of Amount A and Amount B. Amount A is
2005. He must add an inclusion amount to gross income $147 ($10,000 × 70% × 2.1%), the product of the fair
for 2005, the first tax year his qualified business-use per- market value, the average business use for 2004 and
centage is 50% or less. The computer has a 5-year recov- 2005, and the applicable percentage for year one from
ery period under both GDS and ADS. 2005 is the third tax Table A-19. Amount B is zero.
year of the lease, so the applicable percentage from Table
A-19 is −19.8%. The applicable percentage from Table Lease for less than one year. A special rule for the
A-20 is 22.0%. Larry’s deductible rent for the computer for inclusion amount applies if the lease term is less than one
2005 is $800. year and you do not use the property predominantly (more
Larry uses the Inclusion Amount Worksheet for Leased than 50%) for qualified business use. The amount included
Listed Property to figure the amount he must include in in income is the inclusion amount (figured as described in
income for 2005. His inclusion amount is $224, which is the the preceding discussions) multiplied by a fraction. The
sum of −$238 (Amount A) and $462 (Amount B). numerator of the fraction is the number of days in the lease
term and the denominator is 365 (or 366 for leap years).
Inclusion Amount Worksheet The lease term for listed property other than residential
for Leased Listed Property rental or nonresidential real property includes options to
renew. If you have two or more successive leases that are
1. Fair market value . . . . . . . . . . . . . . . . . . . $3,000 part of the same transaction (or a series of related transac-
2. Business/investment use for first year tions) for the same or substantially similar property, treat
business use is 50% or less . . . . . . . . . . . 40 % them as one lease.
3. Multiply line 1 by line 2. . . . . . . . . . . . . . . . 1,200
4. Rate (%) from Table A-19 . . . . . . . . . . . . . −19.8 %
5. Multiply line 3 by line 4. This is Amount A. −238

Example 2. On October 1, 2004, John Joyce, a calen- the business of leasing listed property, including passen-
dar year taxpayer, leased and placed in service an item of ger automobiles, see Exception for leased property, ear-
listed property that is 3-year property. This property had a lier, under What Is the Business-Use Requirement.
fair market value of $15,000 and a recovery period of 5
years under ADS. The lease term was 6 months (ending Maximum Depreciation Deduction
on March 31, 2005), during which he used the property
45% in business. He must include $71 in income in 2005. The passenger automobile limits are the maximum depre-
The $71 is the sum of Amount A and Amount B. Amount A ciation amounts you can deduct for a passenger automo-
is $71 ($15,000 × 45% × 2.1% × 182/365), the product of bile. They are based on the date you placed the
the fair market value, the average business use for both automobile in service.
years, and the applicable percentage for year one from
Table A-19, prorated for the length of the lease. Amount B
is zero. Passenger Automobiles
Where to report inclusion amount. Report the inclusion The maximum deduction amounts for most passenger
amount figured as described in the preceding discussions automobiles are shown in the following table.
as other income on the same form or schedule on which Maximum Depreciation Deduction
you took the deduction for your rental costs. For example, for Passenger Automobiles
report the inclusion amount as other income on Schedule
C (Form 1040) if you took the deduction on Schedule C. (If Date 4th &
you took the deduction for rental costs on Form 2106, Placed 1st 2nd 3rd Later
report the inclusion amount as other income on Form In Service Year Year Year Years
1040, line 21.) 2005 $2,960 $4,700 $2,850 $1,675
2004 10,6101 4,800 2,850 1,675
Do the Passenger Automobile 5/06/2003 –
12/31/2003
10,7102 4,900 2,950 1,775
Limits Apply? 1/01/2003 – 7,6603 4,900 2,950 1,775

5/05/2003
(see Glossary): 2002 7,6603 4,900 2,950 1,775
2001 7,6604 4,900 2,950 1,775
Basis 2000 3,060 4,900 2,950 1,775
Clean-fuel vehicle 1999 3,060 5,000 2,950 1,775
Convention 1998 3,160 5,000 2,950 1,775
Placed in service 1997 3,160 5,000 3,050 1,775
1If you elected not to claim any special depreciation allowance
Recovery period
for the vehicle, the vehicle is not qualified property, or the
vehicle is qualified Liberty Zone property, the maximum
deduction is $2,960.
The depreciation deduction, including the section 179 de-
2If you acquired the vehicle before 5/06/03, the maximum
duction, you can claim for a passenger automobile each
year is limited. (For the definition of a passenger automo- deduction is $7,660. If you elected not to claim any special
bile, see Passenger Automobiles under What Is Listed depreciation allowance for the vehicle, the vehicle is not
qualified property, or the vehicle is qualified Liberty Zone
Property, earlier.) property, the maximum deduction is $3,060.
This section describes the maximum depreciation de- 3If
duction amounts for 2005 and explains how to deduct, you elected not to claim any special depreciation allowance
for the vehicle, the vehicle is not qualified property, or the
after the recovery period, the unrecovered basis of your vehicle is qualified Liberty Zone property, the maximum
property that results from applying the passenger automo- deduction is $3,060.
bile limit. 4 If you acquired the vehicle before 9/11/01, you elected not to
claim any special depreciation allowance for the vehicle, the
Exception for clean-fuel modifications. The passenger vehicle is not qualified property, or the vehicle is qualified
automobile limits do not apply to any costs you pay to Liberty Zone property, the maximum deduction is $3,060.
retrofit parts and components to modify an automobile
placed in service before January 1, 2006, to permit it to run If your business/investment use of the automo-
on a clean-burning fuel. The limits apply only to the cost of
the automobile without the modification.
!
CAUTION
bile is less than 100%, you must reduce the
maximum deduction amount by multiplying the
maximum amount by the percentage of business/invest-
Exception for leased cars. The passenger automobile ment use determined on an annual basis during the tax
limits generally do not apply to passenger automobiles year.
leased or held for leasing by anyone regularly engaged in
the business of leasing passenger automobiles. For infor-
mation on when you are considered regularly engaged in

If you have a short tax year, you must reduce the 4 If you elected not to claim any special depreciation allowance for
!
CAUTION
maximum deduction amount by multiplying the
maximum amount by a fraction. The numerator
the vehicle, the vehicle is not qualified property, or the vehicle is
qualified Liberty Zone property, the maximum deduction is
of the fraction is the number of months and partial months $9,180.
in the short tax year and the denominator is 12. 5 If you acquired the vehicle before 9/11/01, you elected not to
claim any special depreciation allowance for the vehicle, the
Example. On April 15, 2005, Virginia Hart bought and vehicle is not qualified property, or the vehicle is qualified Liberty
Zone property, the maximum deduction is $9,280.
placed in service a new car for $14,500. She used the car
only in her business. She files her tax return based on the For more information on electric vehicles, see chapter
calendar year. She does not elect a section 179 deduction. 12 of Publication 535.
Under MACRS, a car is 5-year property. Since she placed
her car in service on April 15 and used it only for business,
she uses the percentages in Table A-1 to figure her Trucks and Vans
MACRS depreciation on the car. Virginia multiplies the
$14,500 unadjusted basis of her car by 0.20 to get her The maximum depreciation deductions for trucks and vans
MACRS depreciation of $2,900 for 2005. This $2,900 is are higher than those for other passenger automobiles.
below the maximum depreciation deduction of $2,960 for This includes vehicles such as minivans and sport utility
passenger automobiles placed in service in 2005. She can vehicles that are built on a truck chassis. The maximum
deduct the full $2,900. deduction amounts for trucks and vans are shown in the
following table.
Electric Vehicles Maximum Depreciation Deduction

For Trucks and Vans
The maximum depreciation deductions for passenger au-
tomobiles that are produced to run primarily on electricity Date 4th &
are higher than those for other automobiles. The maximum Placed 1st 2nd 3rd Later
deduction amounts for electric cars are shown in the fol- In Service Year Year Year Years
lowing table. 2005 $3,260 $5,200 $3,150 $1,875
Maximum Depreciation Deduction 2004 10,9101 5,300 3,150 1,875
For Electric Vehicles
5/06/2003 – 11,0102 5,400 3,250 1,975
Date 4th & 12/31/2003
Placed 1st 2nd 3rd Later 1/01/2003 – 7,9603 5,400 3,250 1,975
In Service Year Year Year Years
5/05/2003
2005 $8,880 $14,200 $8,450 $5,125 1If you elected not to claim any special depreciation allowance
2004 31,8301 14,300 8,550 5,125 for the vehicle, the vehicle is not qualified property, or the
vehicle is qualified Liberty Zone property, the maximum
5/06/2003 – 32,0302 14,600 8,750 5,225 deduction is $3,260.
12/31/2003
2 If you acquired the vehicle before 5/06/03, the maximum
1/01/2003 – 22,8803 14,600 8,750 5,225 deduction is $7,960. If you elected not to claim any special
5/05/2003 depreciation allowance for the vehicle, the vehicle is not
2002 22,9804 14,700 8,750 5,325 qualified property, or the vehicle is qualified Liberty Zone
property, the maximum deduction is $3,360.
2001 23,0805 14,800 8,850 5,325 3 If you elected not to claim any special depreciation allowance
2000 9,280 14,800 8,850 5,325 for the vehicle, the vehicle is not qualified property, or the
1999 9,280 14,900 8,950 5,325 vehicle is qualified Liberty Zone property, the maximum
deduction is $3,360.
1998 9,380 15,000 8,950 5,425
1997 9,480 15,100 9,050 5,425
1If you elected not to claim any special depreciation allowance for Depreciation Worksheet for
the vehicle, the vehicle is not qualified property, or the vehicle is Passenger Automobiles
qualified Liberty Zone property, the maximum deduction is
$8,880. You can use the following worksheet to figure your depre-
2If you acquired the vehicle before 5/06/03, the maximum deduction ciation deduction using the percentage tables. Then use
is $22,880. If you elected not to claim any special depreciation the information from this worksheet to prepare Form 4562.
allowance for the vehicle, the vehicle is not qualified property, or
the vehicle is qualified Liberty Zone property, the maximum
deduction is $9,080. Depreciation Worksheet for
3
Passenger Automobiles
If you elected not to claim any special depreciation allowance for
the vehicle, the vehicle is not qualified property, or the vehicle is
qualified Liberty Zone property, the maximum deduction is Part I
$9,080.
1. MACRS system (GDS or ADS) . . .
2. Property class . . . . . . . . . . . . . . . .
3. Date placed in service . . . . . . . . . .
4. Recovery period . . . . . . . . . . . . . .

5. Method and convention . . . . . . . . . Depreciation Worksheet for

6. Depreciation rate (from tables) . . . Passenger Automobiles
7. Maximum depreciation deduction
for this year from the appropriate
Part I
table . . . . . . . . . . . . . . . . . . . . . . .
8. Business/investment-use 1. MACRS system (GDS or ADS) GDS
percentage . . . . . . . . . . . . . . . . . . 2. Property class . . . . . . . . . . . . . . 5-year
9. Multiply line 7 by line 8. This is your 3. Date placed in service . . . . . . . . 9/26/05
adjusted maximum depreciation 4. Recovery period . . . . . . . . . . . . 5-Year
deduction . . . . . . . . . . . . . . . . . . . 5. Method and convention . . . . . . . 200% DB/Half-Year
10. Section 179 deduction claimed this
6. Depreciation rate (from tables) . . .20
year (not more than line 9). Enter
-0- if this is not the year you placed 7. Maximum depreciation deduction
the car in service. . . . . . . . . . . . . . for this year from the appropriate
table . . . . . . . . . . . . . . . . . . . . . $2,960
Note. 8. Business/investment-use
1) If line 10 is equal to line 9, stop here. Your percentage . . . . . . . . . . . . . . . . 60%
combined section 179 and depreciation deduction is 9. Multiply line 7 by line 8. This is
limited to the amount on line 9. your adjusted maximum
2) If line 10 is less than line 9, complete Part II. depreciation deduction . . . . . . . $1,776
10. Section 179 deduction claimed
Part II this year (not more than line 9).
11. Subtract line 10 from line 9. This is Enter -0- if this is not the year
the maximum amount you can you placed the car in service. . . $1,000
deduct for depreciation . . . . . . . . .
12. Cost or other basis (reduced by Note.
any section 179A deduction1 or 1) If line 10 is equal to line 9, stop here. Your
credit for electric vehicles2) . . . . . . combined section 179 and depreciation deduction is
13. Multiply line 12 by line 8. This is limited to the amount on line 9.
your business/investment cost . . . . 2) If line 10 is less than line 9, complete Part II.
14. Section 179 deduction and any
special depreciation allowance Part II
claimed in the year you placed the
car in service . . . . . . . . . . . . . . . . 11. Subtract line 10 from line 9. This
15. Subtract line 14 from line 13. This is the maximum amount you can
is your basis for depreciation . . . . . deduct for depreciation . . . . . . . $766
16. Multiply line 15 by line 6. This is 12. Cost or other basis (reduced by
your tentative MACRS depreciation any section 179A deduction1 or
deduction . . . . . . . . . . . . . . . . . . . credit for electric vehicles2) . . . . $18,000
17. Enter the lesser of line 11 or line 13. Multiply line 12 by line 8. This is
16. This is your MACRS your business/investment cost . . $10,800
depreciation deduction . . . . . . . . . 14. Section 179 deduction and any
1The section 179A deduction is for clean-fuel vehicles or special depreciation allowance
clean-fuel vehicle refueling property placed in service before claimed in year you placed the
January 1, 2006. When figuring the amount to enter on line car in service . . . . . . . . . . . . . . . $1,000
12, do not reduce your cost or other basis by any section 179 15. Subtract line 14 from line 13.
deduction you claimed for your car. This is your basis for
2Reduce the basis by the lesser of $4,000 or 10% of the cost of
depreciation . . . . . . . . . . . . . . . $9,800
the vehicle even if the credit is less than that amount. 16. Multiply line 15 by line 6. This is
your tentative MACRS
depreciation deduction . . . . . . . $1,960
The following example shows how to figure your depre- 17. Enter the lesser of line 11 or line
ciation deduction using the worksheet. 16. This is your MACRS
depreciation deduction . . . . . . . $776
Example. On September 26, 2005, Donald Banks 1The section 179A deduction is for clean-fuel vehicles or
bought and placed in service a new car for $18,000. He
clean-fuel vehicle refueling property placed in service before
used the car 60% for business during 2005. He files his tax January 1, 2006. When figuring the amount to enter on line
return based on the calendar year. Under GDS, his car is 12, do not reduce your cost or other basis by any section 179
5-year property. Donald is electing a section 179 deduction deduction you claimed for your car.
of $1,000 on the car. He uses Table A-1 to determine the 2Reduce the basis by the lesser of $4,000 or 10% of the cost of
depreciation rate. Donald’s MACRS depreciation deduc- the vehicle even if the credit is less than that amount.
tion is limited to $466, as shown in the following worksheet.

Deductions After the Deductions For Passenger

Recovery Period Automobiles Acquired in a Trade-in
If the depreciation deductions for your automobile are If you acquire a passenger automobile in a trade-in, depre-
reduced under the passenger automobile limits, you will ciate the carryover basis separately as if the trade-in did
have unrecovered basis in your automobile at the end of not occur. If the automobile acquired in the trade-in is
the recovery period. If you continue to use the automobile qualified Liberty Zone property or qualified Gulf Opportu-
nity Zone property, the carryover basis is eligible for a
for business, you can deduct that unrecovered basis after
special depreciation allowance. See Qualified Liberty Zone
the recovery period ends. You can claim a depreciation
Property and Qualified Gulf Opportunity Zone Property in
deduction in each succeeding tax year until you recover chapter 3. Depreciate the part of the new automobile’s
your full basis in the car. The maximum amount you can basis that exceeds its carryover basis (excess basis) as if it
deduct each year is determined by the date you placed the were newly placed in service property. This excess basis is
car in service and your business/investment-use percent- the additional cash paid for the new automobile in the
age. See Maximum Depreciation Deduction, earlier. trade-in.
Unrecovered basis is the cost or other basis of the The depreciation figured for the two components of the
passenger automobile reduced by any clean-fuel vehicle basis (carryover basis and excess basis) is subject to a
deduction, electric vehicle credit, depreciation, and section single passenger automobile limit. Special rules apply in
179 deductions that would have been allowable if you had determining the passenger automobile limits. These rules
used the car 100% for business and investment use and and examples are discussed in section 1.168(i)-6T(d)(3) of
the passenger automobile limits had not applied. the regulations.
Instead of figuring depreciation for the carryover basis
You cannot claim a depreciation deduction for and the excess basis separately, you can elect to treat the
!
CAUTION
listed property other than passenger automo-
biles after the recovery period ends. There is no
old automobile as disposed of and both of the basis com-
ponents for the new automobile as if placed in service at
unrecovered basis at the end of the recovery period be- the time of the trade-in. For more information, including
cause you are considered to have used this property 100% how to make this election, see Election out under Property
for business and investment purposes during all of the Acquired in a Like-kind Exchange or Involuntary Conver-
recovery period. sion in chapter 4 and sections 1.168(i)-6T(i) and
1.168(i)-6T(j) of the regulations.
Example. In May 2000, you bought and placed in serv-
ice a car costing $30,000. The car was 5-year property
under GDS (MACRS). You did not elect a section 179
deduction for the car. You used the car exclusively for
What Records Must Be Kept?
business during the recovery period (2000 through 2005). Terms you may need to know
You figured your depreciation as shown below. (see Glossary):
Year Percentage Amount Limit Allowed
2000 20.0% $6,000 $3,060 $3,060
2001 32.0 9,600 4,900 4,900 Circumstantial evidence
2002 19.2 5,760 2,950 2,950
2003 11.52 3,456 1,775 1,775 Documentary evidence
2004 11.52 3,456 1,775 1,775
2005 5.76 1,728 1,775 1,728
You cannot take any depreciation or section 179 deduction
Total . . . ......... ............... $16,188
for the use of listed property unless you can prove your
At the end of 2005, you had an unrecovered basis of business/investment use with adequate records or with
$13,812 ($30,000 − $16,188). If in 2006 and later years sufficient evidence to support your own statements. The
you continue to use the car 100% for business, you can period of time you must keep these records is discussed
later under How Long To Keep Records.
deduct each year the lesser of $1,775 or your remaining
unrecovered basis.
If your business use of the car had been less than 100%
Adequate Records
during any year, your depreciation deduction would have
been less than the maximum amount allowable for that
year. However, in figuring your unrecovered basis in the To meet the adequate records requirement, you
must maintain an account book, diary, log, state-
car, you would still reduce your basis by the maximum RECORDS ment of expense, trip sheet, or similar record or
amount allowable as if the business use had been 100%. other documentary evidence that, together with the re-
For example, if you had used your car 60% for business ceipt, is sufficient to establish each element of an expendi-
instead of 100%, your allowable depreciation deductions ture or use. You do not have to record information in an
would have been $9,713 ($16,188 × 60%), but you still account book, diary, or similar record if the information is
would have to reduce your basis by $16,188 to determine already shown on the receipt. However, your records
your unrecovered basis. should back up your receipts in an orderly manner.

Elements of expenditure or use. Your records or other listed property in a computer memory device that uses a
documentary evidence must support all the following. logging program.
• The amount of each separate expenditure, such as
the cost of acquiring the item, maintenance and re- Separate or combined expenditures or uses. Each use
pair costs, capital improvement costs, lease pay- by you normally is considered a separate use. However,
ments, and any other expenses. you can combine repeated uses as a single item.
Record each expenditure as a separate item. Do not
• The amount of each business and investment use combine it with other expenditures. If you choose, how-
(based on an appropriate measure, such as mileage ever, you can combine amounts you spent for the use of
for vehicles and time for other listed property), and listed property during a tax year, such as for gasoline or
the total use of the property for the tax year. automobile repairs. If you combine these expenses, you do
• The date of the expenditure or use. not need to support the business purpose of each ex-
pense. Instead, you can divide the expenses based on the
• The business or investment purpose for the expendi- total business use of the listed property.
ture or use. You can account for uses that can be considered part of
a single use, such as a round trip or uninterrupted business
Written documents of your expenditure or use are gener- use, by a single record. For example, you can account for
ally better evidence than oral statements alone. You do not the use of a truck to make deliveries at several locations
have to keep a daily log. However, some type of record that begin and end at the business premises and can
containing the elements of an expenditure or the business include a stop at the business in between deliveries by a
or investment use of listed property made at or near the single record of miles driven. You can account for the use
time of the expenditure or use and backed up by other of a passenger automobile by a salesperson for a business
documents is preferable to a statement you prepare later. trip away from home over a period of time by a single
record of miles traveled. Minimal personal use (such as a
Timeliness. You must record the elements of an expendi- stop for lunch between two business stops) is not an
ture or use at the time you have full knowledge of the interruption of business use.
elements. An expense account statement made from an
account book, diary, or similar record prepared or main- Confidential information. If any of the information on the
tained at or near the time of the expenditure or use gener- elements of an expenditure or use is confidential, you do
ally is considered a timely record if, in the regular course of not need to include it in the account book or similar record if
business: you record it at or near the time of the expenditure or use.
• The statement is given by an employee to the em- You must keep it elsewhere and make it available as
ployer, or support to the IRS director for your area on request.
• The statement is given by an independent contractor Substantial compliance. If you have not fully supported
to the client or customer.
a particular element of an expenditure or use, but have
complied with the adequate records requirement for the
For example, a log maintained on a weekly basis, that
expenditure or use to the satisfaction of the IRS director for
accounts for use during the week, will be considered a
your area, you can establish this element by any evidence
record made at or near the time of use.
the IRS director for your area deems adequate.
Business purpose supported. Generally, an adequate If you fail to establish to the satisfaction of the IRS
record of business purpose must be in the form of a written director for your area that you have substantially complied
statement. However, the amount of detail necessary to with the adequate records requirement for an element of
establish a business purpose depends on the facts and an expenditure or use, you must establish the element as
circumstances of each case. A written explanation of the follows.
business purpose will not be required if the purpose can be • By your own oral or written statement containing
determined from the surrounding facts and circumstances. detailed information as to the element.
For example, a salesperson visiting customers on an es-
tablished sales route will not normally need a written expla- • By other evidence sufficient to establish the element.
nation of the business purpose of his or her travel.
If the element is the cost or amount, time, place, or date
Business use supported. An adequate record contains of an expenditure or use, its supporting evidence must be
enough information on each element of every business or direct evidence, such as oral testimony by witnesses or a
investment use. The amount of detail required to support written statement setting forth detailed information about
the use depends on the facts and circumstances. For the element or the documentary evidence. If the element is
example, a taxpayer who uses a truck for both business the business purpose of an expenditure, its supporting
and personal purposes and whose only business use of evidence can be circumstantial evidence.
the truck is to make customer deliveries on an established
route can satisfy the requirement by recording the length of Sampling. You can maintain an adequate record for part
the route, including the total number of miles driven during of a tax year and use that record to support your business
the tax year and the date of each trip at or near the time of and investment use of listed property for the entire tax year
the trips. if it can be shown by other evidence that the periods for
Although you generally must prepare an adequate writ- which you maintain an adequate record are representative
ten record, you can prepare a record of the business use of of the use throughout the year.

Example 1. Denise Williams, a sole proprietor and cal-

endar year taxpayer, operates an interior decorating busi- How Is Listed Property
ness out of her home. She uses her automobile for local
business visits to the homes or offices of clients, for meet- Information Reported?
ings with suppliers and subcontractors, and to pick up and
deliver items to clients. There is no other business use of Terms you may need to know
the automobile, but she and family members also use it for (see Glossary):
personal purposes. She maintains adequate records for
the first 3 months of the year showing that 75% of the Commuting
automobile use was for business. Subcontractor invoices
and paid bills show that her business continued at approxi- Standard mileage rate
mately the same rate for the rest of the year. If there is no
change in circumstances, such as the purchase of a sec-
ond car for exclusive use in her business, the determina- You must provide the information about your listed prop-
tion that her combined business/investment use of the erty requested in Part V of Form 4562, Section A, if you
automobile for the tax year is 75% rests on sufficient claim either of the following deductions.
supporting evidence. • Any deduction for a vehicle.
Example 2. Assume the same facts as in Example 1, • A depreciation deduction for any other listed prop-
except that Denise maintains adequate records during the erty.
first week of every month showing that 75% of her use of If you claim any deduction for a vehicle, you also must
the automobile is for business. Her business invoices show provide the information requested in Section B. (If you
that her business continued at the same rate during the provide the vehicle for your employee’s use, the employee
later weeks of each month so that her weekly records are must give you this information.) If you provide any vehicle
representative of the automobile’s business use through- for use by an employee, you must first answer the ques-
out the month. The determination that her business/invest- tions in Section C to see if you meet an exception to
ment use of the automobile for the tax year is 75% rests on completing Section B for that vehicle.
sufficient supporting evidence.
Vehicles used by your employees. You do not have to
Example 3. Bill Baker, a sole proprietor and calendar complete Section B, Part V, for vehicles used by your
year taxpayer, is a salesman in a large metropolitan area employees who are not more-than-5% owners or related
for a company that manufactures household products. For persons if you meet at least one of the following require-
the first 3 weeks of each month, he occasionally uses his ments.
own automobile for business travel within the metropolitan
area. During these weeks, his business use of the automo- 1. You maintain a written policy statement that prohibits
bile does not follow a consistent pattern. During the fourth one of the following uses of the vehicles.
week of each month, he delivers all business orders taken
during the previous month. The business use of his auto- a. All personal use including commuting.
mobile, as supported by adequate records, is 70% of its b. Personal use, other than commuting, by employ-
total use during that fourth week. The determination based ees who are not officers, directors, or 1%-or-more
on the record maintained during the fourth week of the owners.
month that his business/investment use of the automobile
for the tax year is 70% does not rest on sufficient support- 2. You treat all use of the vehicles by your employees
ing evidence because his use during that week is not as personal use.
representative of use during other periods.
3. You provide more than five vehicles for use by your
Loss of records. When you establish that failure to pro- employees, and you keep in your records the infor-
duce adequate records is due to loss of the records mation on their use given to you by the employees.
through circumstances beyond your control, such as
through fire, flood, earthquake, or other casualty, you have 4. For demonstrator automobiles provided to full-time
the right to support a deduction by reasonable reconstruc- salespersons, you maintain a written policy state-
tion of your expenditures and use. ment that limits the total mileage outside the
salesperson’s normal working hours and prohibits
use of the automobile by anyone else, for vacation
How Long To Keep Records trips, or to store personal possessions.
For listed property, you must keep records for as Exceptions. If you file Form 2106, 2106-EZ, or Schedule
long as any recapture can still occur. Recapture C-EZ (Form 1040), and you are not required to file Form
RECORDS can occur in any tax year of the recovery period. 4562, report information about listed property on that form
and not on Form 4562. Also, if you file Schedule C (Form
1040) and are claiming the standard mileage rate or actual
vehicle expenses (except depreciation) and you are not
required to file Form 4562 for any other reason, report
vehicle information in Part IV of Schedule C and not on
Form 4562.

• View Internal Revenue Bulletins (IRBs) published in

the last few years.
6. • Figure your withholding allowances using our Form
W-4 calculator.
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You can get help with unresolved tax issues, order free • Get information on starting and operating a small
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Phone. Many services are available by phone.
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Contacting your Taxpayer Advocate. If you have at-

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should contact your Taxpayer Advocate. 1-800-829-3676 to order current-year forms, in-
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To contact your Taxpayer Advocate: explain IRS letters, request adjustments to your ac-
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• Call the Taxpayer Advocate toll free at local Taxpayer Assistance Center for an appoint-
1-877-777-4778.
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• Call, write, or fax the Taxpayer Advocate office in contacts or look in the phone book under United
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Help With Unresolved Tax Problems (now available in tax topics.
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and press 1 for automated refund information or
Free tax services. To find out what services are avail-
call 1-800-829-1954. Be sure to wait at least 6
able, get Publication 910, IRS Guide to Free Tax Services.
weeks from the date you filed your return (3 weeks
It contains a list of free tax publications and an index of tax
if you filed electronically). Have your 2005 tax re-
topics. It also describes other free tax information services,
turn available because you will need to know your
including tax education and assistance programs and a list
social security number, your filing status, and the
of TeleTax topics.
exact whole dollar amount of your refund.
Internet. You can access the IRS website 24
hours a day, 7 days a week, at www.irs.gov to:
Evaluating the quality of our telephone services. To
ensure that IRS representatives give accurate, courteous,
and professional answers, we use several methods to
• E-file your return. Find out about commercial tax evaluate the quality of our telephone services. One method
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gible taxpayers. on or record telephone calls. Another is to ask some callers
• Check the status of your 2005 refund. Click on to complete a short survey at the end of the call.
Where’s My Refund. Be sure to wait at least 6
weeks from the date you filed your return (3 weeks Walk-in. Many products and services are avail-
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turn available because you will need to know your
social security number, your filing status, and the
exact whole dollar amount of your refund. • Products. You can walk in to many post offices,
• Download forms, instructions, and publications. libraries, and IRS offices to pick up certain forms,
instructions, and publications. Some IRS offices,
• Order IRS products online. libraries, grocery stores, copy centers, city and
• Research your tax questions online. county government offices, credit unions, and office
• Search publications online by topic or keyword. supply stores have a collection of products avail-
Page 66 Chapter 6 How To Get Tax Help

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libraries have the Internal Revenue Code, regula- • Tax Map: an electronic research tool and finding
tions, Internal Revenue Bulletins, and Cumulative aid.
Bulletins available for research purposes.
• Tax law frequently asked questions (FAQs).
• Services. You can walk in to your local Taxpayer
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Chapter 6 How To Get Tax Help Page 67

Appendix A
MACRS Percentage Table Guide
General Depreciation System (GDS)
Alternative Depreciation System (ADS)
Chart 1. Use this chart to find the correct percentage table to use for any property other than residential rental
and nonresidential real property. Use Chart 2 for residential rental and nonresidential real property.
Month or
Quarter
MACRS Depreciation Placed
System Method Recovery Period Convention Class in Service Table
GDS 200% GDS/3, 5, 7, 10 (Nonfarm) Half-Year 3, 5, 7, 10 Any A-1
GDS 200% GDS/3, 5, 7, 10 (Nonfarm) Mid-Quarter 3, 5, 7, 10 1st Qtr A-2
2nd Qtr A-3
3rd Qtr A-4
4th Qtr A-5
GDS 150% GDS/3, 5, 7, 10 Half-Year 3, 5, 7, 10 Any A-14
GDS 150% GDS/3, 5, 7, 10 Mid-Quarter 3, 5, 7, 10 1st Qtr A-15
2nd Qtr A-16
3rd Qtr A-17
4th Qtr A-18
GDS 150% GDS/15, 20 Half-Year 15 & 20 Any A-1
GDS 150% GDS/15, 20 Mid-Quarter 15 & 20 1st Qtr A-2
2nd Qtr A-3
3rd Qtr A-4
4th Qtr A-5
GDS SL GDS Half-Year Any Any A-8
ADS ADS
GDS SL GDS Mid-Quarter Any 1st Qtr A-9
ADS ADS 2nd Qtr A-10
3rd Qtr A-11
4th Qtr A-12
ADS 150% ADS Half-Year Any Any A-14
ADS 150% ADS Mid-Quarter Any 1st Qtr A-15
2nd Qtr A-16
3rd Qtr A-17
4th Qtr A-18
Chart 2. Use this chart to find the correct percentage table to use for residential rental and nonresidential real
property. Use Chart 1 for all other property.
Month or
Quarter
MACRS Depreciation Placed
System Method Recovery Period Convention Class in Service Table
GDS SL GDS/27.5 Mid-Month Residential Rental Any A-6
GDS SL GDS/31.5 Mid-Month Nonresidential Real Any A-7
SL GDS/39 A-7a
ADS SL ADS/40 Mid-Month Residential Rental Any A-13
and
Nonresidential Real
Chart 3. Income Inclusion Amount Rates

for MACRS Leased Listed Property
Table
Amount A Percentages A-19
Amount B Percentages A-20
Page 68
Table A-1. 3-, 5-, 7-, 10-, 15-, and 20-Year Property
Half-Year Convention
Depreciation rate for recovery period
Year
3-year 5-year 7-year 10-year 15-year 20-year
1 33.33% 20.00% 14.29% 10.00% 5.00% 3.750%

2 44.45 32.00 24.49 18.00 9.50 7.219
3 14.81 19.20 17.49 14.40 8.55 6.677
4 7.41 11.52 12.49 11.52 7.70 6.177
5 11.52 8.93 9.22 6.93 5.713
6 5.76 8.92 7.37 6.23 5.285

7 8.93 6.55 5.90 4.888
8 4.46 6.55 5.90 4.522
9 6.56 5.91 4.462
10 6.55 5.90 4.461
11 3.28 5.91 4.462

12 5.90 4.461
13 5.91 4.462
14 5.90 4.461
15 5.91 4.462
16 2.95 4.461
17 4.462
18 4.461
19 4.462
20 4.461
21 2.231
Mid-Quarter Convention
Placed in Service in First Quarter
Year
1 58.33% 35.00% 25.00% 17.50% 8.75% 6.563%

2 27.78 26.00 21.43 16.50 9.13 7.000
3 12.35 15.60 15.31 13.20 8.21 6.482
4 1.54 11.01 10.93 10.56 7.39 5.996
5 11.01 8.75 8.45 6.65 5.546
6 1.38 8.74 6.76 5.99 5.130

7 8.75 6.55 5.90 4.746
8 1.09 6.55 5.91 4.459
9 6.56 5.90 4.459
10 6.55 5.91 4.459
11 0.82 5.90 4.459

12 5.91 4.460
13 5.90 4.459
14 5.91 4.460
15 5.90 4.459
16 0.74 4.460
17 4.459
18 4.460
19 4.459
20 4.460
21 0.557
Page 69
Placed in Service in Second Quarter
Year
1 41.67% 25.00% 17.85% 12.50% 6.25% 4.688%

2 38.89 30.00 23.47 17.50 9.38 7.148
3 14.14 18.00 16.76 14.00 8.44 6.612
4 5.30 11.37 11.97 11.20 7.59 6.116
5 11.37 8.87 8.96 6.83 5.658
6 4.26 8.87 7.17 6.15 5.233

7 8.87 6.55 5.91 4.841
8 3.34 6.55 5.90 4.478
9 6.56 5.91 4.463
10 6.55 5.90 4.463
11 2.46 5.91 4.463

12 5.90 4.463
13 5.91 4.463
14 5.90 4.463
15 5.91 4.462
16 2.21 4.463
17 4.462
18 4.463
19 4.462
20 4.463
21 1.673
Placed in Service in Third Quarter
Year
1 25.00% 15.00% 10.71% 7.50% 3.75% 2.813%

2 50.00 34.00 25.51 18.50 9.63 7.289
3 16.67 20.40 18.22 14.80 8.66 6.742
4 8.33 12.24 13.02 11.84 7.80 6.237
5 11.30 9.30 9.47 7.02 5.769
6 7.06 8.85 7.58 6.31 5.336

7 8.86 6.55 5.90 4.936
8 5.53 6.55 5.90 4.566
9 6.56 5.91 4.460
10 6.55 5.90 4.460
11 4.10 5.91 4.460

12 5.90 4.460
13 5.91 4.461
14 5.90 4.460
15 5.91 4.461
16 3.69 4.460
17 4.461
18 4.460
19 4.461
20 4.460
21 2.788
Page 70
Placed in Service in Fourth Quarter
Year
1 8.33% 5.00% 3.57% 2.50% 1.25% 0.938%

2 61.11 38.00 27.55 19.50 9.88 7.430
3 20.37 22.80 19.68 15.60 8.89 6.872
4 10.19 13.68 14.06 12.48 8.00 6.357
5 10.94 10.04 9.98 7.20 5.880
6 9.58 8.73 7.99 6.48 5.439

7 8.73 6.55 5.90 5.031
8 7.64 6.55 5.90 4.654
9 6.56 5.90 4.458
10 6.55 5.91 4.458
11 5.74 5.90 4.458

12 5.91 4.458
13 5.90 4.458
14 5.91 4.458
15 5.90 4.458
16 5.17 4.458
17 4.458
18 4.459
19 4.458
20 4.459
21 3.901
Table A-6. Residential Rental Property

Mid-Month Convention
Straight Line—27.5 Years
Month property placed in service
Year
1 2 3 4 5 6 7 8 9 10 11 12
1 3.485% 3.182% 2.879% 2.576% 2.273% 1.970% 1.667% 1.364% 1.061% 0.758% 0.455% 0.152%
2–9 3.636 3.636 3.636 3.636 3.636 3.636 3.636 3.636 3.636 3.636 3.636 3.636
10 3.637 3.637 3.637 3.637 3.637 3.637 3.636 3.636 3.636 3.636 3.636 3.636
11 3.636 3.636 3.636 3.636 3.636 3.636 3.637 3.637 3.637 3.637 3.637 3.637
12 3.637 3.637 3.637 3.637 3.637 3.637 3.636 3.636 3.636 3.636 3.636 3.636
13 3.636 3.636 3.636 3.636 3.636 3.636 3.637 3.637 3.637 3.637 3.637 3.637
14 3.637 3.637 3.637 3.637 3.637 3.637 3.636 3.636 3.636 3.636 3.636 3.636
15 3.636 3.636 3.636 3.636 3.636 3.636 3.637 3.637 3.637 3.637 3.637 3.637
16 3.637 3.637 3.637 3.637 3.637 3.637 3.636 3.636 3.636 3.636 3.636 3.636
17 3.636 3.636 3.636 3.636 3.636 3.636 3.637 3.637 3.637 3.637 3.637 3.637
18 3.637 3.637 3.637 3.637 3.637 3.637 3.636 3.636 3.636 3.636 3.636 3.636
19 3.636 3.636 3.636 3.636 3.636 3.636 3.637 3.637 3.637 3.637 3.637 3.637
20 3.637 3.637 3.637 3.637 3.637 3.637 3.636 3.636 3.636 3.636 3.636 3.636
21 3.636 3.636 3.636 3.636 3.636 3.636 3.637 3.637 3.637 3.637 3.637 3.637
22 3.637 3.637 3.637 3.637 3.637 3.637 3.636 3.636 3.636 3.636 3.636 3.636
23 3.636 3.636 3.636 3.636 3.636 3.636 3.637 3.637 3.637 3.637 3.637 3.637
24 3.637 3.637 3.637 3.637 3.637 3.637 3.636 3.636 3.636 3.636 3.636 3.636
25 3.636 3.636 3.636 3.636 3.636 3.636 3.637 3.637 3.637 3.637 3.637 3.637
26 3.637 3.637 3.637 3.637 3.637 3.637 3.636 3.636 3.636 3.636 3.636 3.636
27 3.636 3.636 3.636 3.636 3.636 3.636 3.637 3.637 3.637 3.637 3.637 3.637
28 1.97 2.273 2.576 2.879 3.182 3.485 3.636 3.636 3.636 3.636 3.636 3.636
29 0.152 0.455 0.758 1.061 1.364 1.667
Page 71
Table A-7. Nonresidential Real Property

Straight Line—31.5 Years
Year
1 2 3 4 5 6 7 8 9 10 11 12
1 3.042% 2.778% 2.513% 2.249% 1.984% 1.720% 1.455% 1.190% 0.926% 0.661% 0.397% 0.132%
2–7 3.175 3.175 3.175 3.175 3.175 3.175 3.175 3.175 3.175 3.175 3.175 3.175
8 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.175 3.175 3.175 3.175 3.175
9 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175
10 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174
11 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175
12 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174
13 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175
14 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174
15 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175
16 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174
17 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175
18 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174
19 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175
20 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174
21 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175
22 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174
23 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175
24 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174
25 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175
26 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174
27 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175
28 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174
29 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175
30 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174
31 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175
32 1.720 1.984 2.249 2.513 2.778 3.042 3.175 3.174 3.175 3.174 3.175 3.174
33 0.132 0.397 0.661 0.926 1.190 1.455
Table A-7a. Nonresidential Real Property

Straight Line—39 Years
Year
1 2 3 4 5 6 7 8 9 10 11 12
1 2.461% 2.247% 2.033% 1.819% 1.605% 1.391% 1.177% 0.963% 0.749% 0.535% 0.321% 0.107%
2–39 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564
40 0.107 0.321 0.535 0.749 0.963 1.177 1.391 1.605 1.819 2.033 2.247 2.461
Page 72
Table A-8. Straight Line Method

Recovery periods in years
Year
2.5 3 3.5 4 5 6 6.5 7 7.5 8 8.5 9 9.5
1 20.0% 16.67% 14.29% 12.5% 10.0% 8.33% 7.69% 7.14% 6.67% 6.25% 5.88% 5.56% 5.26%
2 40.0 33.33 28.57 25.0 20.0 16.67 15.39 14.29 13.33 12.50 11.77 11.11 10.53
3 40.0 33.33 28.57 25.0 20.0 16.67 15.38 14.29 13.33 12.50 11.76 11.11 10.53
4 16.67 28.57 25.0 20.0 16.67 15.39 14.28 13.33 12.50 11.77 11.11 10.53
5 12.5 20.0 16.66 15.38 14.29 13.34 12.50 11.76 11.11 10.52
6 10.0 16.67 15.39 14.28 13.33 12.50 11.77 11.11 10.53

7 8.33 15.38 14.29 13.34 12.50 11.76 11.11 10.52
8 7.14 13.33 12.50 11.77 11.11 10.53
9 6.25 11.76 11.11 10.52
10 5.56 10.53
Table A-8. ( Continued)

Year
10 10.5 11 11.5 12 12.5 13 13.5 14 15 16 16.5 17
1 5.0% 4.76% 4.55% 4.35% 4.17% 4.0% 3.85% 3.70% 3.57% 3.33% 3.13% 3.03% 2.94%
2 10.0 9.52 9.09 8.70 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
3 10.0 9.52 9.09 8.70 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
4 10.0 9.53 9.09 8.69 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
5 10.0 9.52 9.09 8.70 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
6 10.0 9.53 9.09 8.69 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
7 10.0 9.52 9.09 8.70 8.34 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
8 10.0 9.53 9.09 8.69 8.33 8.0 7.69 7.41 7.15 6.66 6.25 6.06 5.88
9 10.0 9.52 9.09 8.70 8.34 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
10 10.0 9.53 9.09 8.69 8.33 8.0 7.70 7.40 7.15 6.66 6.25 6.06 5.88
11 5.0 9.52 9.09 8.70 8.34 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.89
12 4.55 8.69 8.33 8.0 7.70 7.40 7.15 6.66 6.25 6.06 5.88
13 4.17 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.89
14 3.85 7.40 7.15 6.66 6.25 6.06 5.88
15 3.57 6.67 6.25 6.06 5.89
16 3.33 6.25 6.06 5.88

17 3.12 6.07 5.89
18 2.94
Page 73

Year
18 19 20 22 24 25 26.5 28 30 35 40 45 50
1 2.78% 2.63% 2.5% 2.273% 2.083% 2.0% 1.887% 1.786% 1.667% 1.429% 1.25% 1.111% 1.0%
2 5.56 5.26 5.0 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.50 2.222 2.0
3 5.56 5.26 5.0 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.50 2.222 2.0
4 5.55 5.26 5.0 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.50 2.222 2.0
5 5.56 5.26 5.0 4.546 4.167 4.0 3.774 3.571 3.333 2.857 2.50 2.222 2.0
6 5.55 5.26 5.0 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.50 2.222 2.0
7 5.56 5.26 5.0 4.546 4.167 4.0 3.773 3.572 3.333 2.857 2.50 2.222 2.0
8 5.55 5.26 5.0 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.50 2.222 2.0
9 5.56 5.27 5.0 4.546 4.167 4.0 3.773 3.572 3.333 2.857 2.50 2.222 2.0
10 5.55 5.26 5.0 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.50 2.222 2.0
11 5.56 5.27 5.0 4.546 4.166 4.0 3.773 3.572 3.333 2.857 2.50 2.222 2.0
12 5.55 5.26 5.0 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.50 2.222 2.0
13 5.56 5.27 5.0 4.546 4.166 4.0 3.773 3.572 3.334 2.857 2.50 2.222 2.0
14 5.55 5.26 5.0 4.545 4.167 4.0 3.773 3.571 3.333 2.857 2.50 2.222 2.0
15 5.56 5.27 5.0 4.546 4.166 4.0 3.774 3.572 3.334 2.857 2.50 2.222 2.0
16 5.55 5.26 5.0 4.545 4.167 4.0 3.773 3.571 3.333 2.857 2.50 2.222 2.0
17 5.56 5.27 5.0 4.546 4.166 4.0 3.774 3.572 3.334 2.857 2.50 2.222 2.0
18 5.55 5.26 5.0 4.545 4.167 4.0 3.773 3.571 3.333 2.857 2.50 2.222 2.0
19 2.78 5.27 5.0 4.546 4.166 4.0 3.774 3.572 3.334 2.857 2.50 2.222 2.0
20 2.63 5.0 4.545 4.167 4.0 3.773 3.571 3.333 2.857 2.50 2.222 2.0
21 2.5 4.546 4.166 4.0 3.774 3.572 3.334 2.857 2.50 2.222 2.0
22 4.545 4.167 4.0 3.773 3.571 3.333 2.857 2.50 2.222 2.0
23 2.273 4.166 4.0 3.774 3.572 3.334 2.857 2.50 2.222 2.0
24 4.167 4.0 3.773 3.571 3.333 2.857 2.50 2.222 2.0
25 2.083 4.0 3.774 3.572 3.334 2.857 2.50 2.222 2.0
26 2.0 3.773 3.571 3.333 2.857 2.50 2.222 2.0

27 3.774 3.572 3.334 2.857 2.50 2.223 2.0
28 3.571 3.333 2.858 2.50 2.222 2.0
29 1.786 3.334 2.857 2.50 2.223 2.0
30 3.333 2.858 2.50 2.222 2.0
31 1.667 2.857 2.50 2.223 2.0

32 2.858 2.50 2.222 2.0
33 2.857 2.50 2.223 2.0
34 2.858 2.50 2.222 2.0
35 2.857 2.50 2.223 2.0
36 1.429 2.50 2.222 2.0

37 2.50 2.223 2.0
38 2.50 2.222 2.0
39 2.50 2.223 2.0
40 2.50 2.222 2.0
41 1.25 2.223 2.0

42 2.222 2.0
43 2.223 2.0
44 2.222 2.0
45 2.223 2.0
46 1.111 2.0
47–50 2.0
51 1.0
Page 74

Placed in Service in First Quarter
Year
2.5 3 3.5 4 5 6 6.5 7 7.5 8 8.5 9 9.5
1 35.0% 29.17% 25.00% 21.88% 17.5% 14.58% 13.46% 12.50% 11.67% 10.94% 10.29% 9.72% 9.21%
2 40.0 33.33 28.57 25.00 20.0 16.67 15.38 14.29 13.33 12.50 11.77 11.11 10.53
3 25.0 33.33 28.57 25.00 20.0 16.67 15.39 14.28 13.33 12.50 11.76 11.11 10.53
4 4.17 17.86 25.00 20.0 16.67 15.38 14.29 13.33 12.50 11.77 11.11 10.53
5 3.12 20.0 16.66 15.39 14.28 13.34 12.50 11.76 11.11 10.52
6 2.5 16.67 15.38 14.29 13.33 12.50 11.77 11.11 10.53

7 2.08 9.62 14.28 13.34 12.50 11.76 11.11 10.52
8 1.79 8.33 12.50 11.77 11.12 10.53
9 1.56 7.35 11.11 10.52
10 1.39 6.58

Year
10 10.5 11 11.5 12 12.5 13 13.5 14 15 16 16.5 17
1 8.75% 8.33% 7.95% 7.61% 7.29% 7.0% 6.73% 6.48% 6.25% 5.83% 5.47% 5.30% 5.15%
2 10.00 9.52 9.09 8.70 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
3 10.00 9.52 9.09 8.70 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
4 10.00 9.53 9.09 8.69 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
5 10.00 9.52 9.09 8.70 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
6 10.00 9.53 9.09 8.69 8.34 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
7 10.00 9.52 9.09 8.70 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
8 10.00 9.53 9.09 8.69 8.34 8.0 7.69 7.41 7.15 6.66 6.25 6.06 5.88
9 10.00 9.52 9.09 8.70 8.33 8.0 7.70 7.40 7.14 6.67 6.25 6.06 5.88
10 10.00 9.53 9.10 8.69 8.34 8.0 7.69 7.41 7.15 6.66 6.25 6.06 5.88
11 1.25 5.95 9.09 8.70 8.33 8.0 7.70 7.40 7.14 6.67 6.25 6.06 5.88
12 1.14 5.43 8.34 8.0 7.69 7.41 7.15 6.66 6.25 6.06 5.89
13 1.04 5.0 7.70 7.40 7.14 6.67 6.25 6.06 5.88
14 0.96 4.63 7.15 6.66 6.25 6.06 5.89
15 0.89 6.67 6.25 6.06 5.88
16 0.83 6.25 6.07 5.89

17 0.78 3.79 5.88
18 0.74
Page 75

Year
18 19 20 22 24 25 26.5 28 30 35 40 45 50
1 4.86% 4.61% 4.375% 3.977% 3.646% 3.5% 3.302% 3.125% 2.917% 2.500% 2.188% 1.944% 1.75%
2 5.56 5.26 5.000 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
3 5.56 5.26 5.000 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
4 5.56 5.26 5.000 4.546 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
5 5.55 5.26 5.000 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
6 5.56 5.26 5.000 4.546 4.167 4.0 3.774 3.572 3.333 2.857 2.500 2.222 2.00
7 5.55 5.26 5.000 4.545 4.167 4.0 3.773 3.571 3.333 2.857 2.500 2.222 2.00
8 5.56 5.26 5.000 4.546 4.167 4.0 3.774 3.572 3.333 2.857 2.500 2.222 2.00
9 5.55 5.26 5.000 4.545 4.167 4.0 3.773 3.571 3.333 2.857 2.500 2.222 2.00
10 5.56 5.27 5.000 4.546 4.166 4.0 3.774 3.572 3.333 2.857 2.500 2.222 2.00
11 5.55 5.26 5.000 4.545 4.167 4.0 3.773 3.571 3.333 2.857 2.500 2.222 2.00
12 5.56 5.27 5.000 4.546 4.166 4.0 3.774 3.572 3.333 2.857 2.500 2.222 2.00
13 5.55 5.26 5.000 4.545 4.167 4.0 3.773 3.571 3.334 2.857 2.500 2.222 2.00
14 5.56 5.27 5.000 4.546 4.166 4.0 3.774 3.572 3.333 2.857 2.500 2.222 2.00
15 5.55 5.26 5.000 4.545 4.167 4.0 3.773 3.571 3.334 2.857 2.500 2.222 2.00
16 5.56 5.27 5.000 4.546 4.166 4.0 3.774 3.572 3.333 2.857 2.500 2.222 2.00
17 5.55 5.26 5.000 4.545 4.167 4.0 3.773 3.571 3.334 2.857 2.500 2.222 2.00
18 5.56 5.27 5.000 4.546 4.166 4.0 3.774 3.572 3.333 2.857 2.500 2.222 2.00
19 0.69 5.26 5.000 4.545 4.167 4.0 3.773 3.571 3.334 2.857 2.500 2.222 2.00
20 0.66 5.000 4.546 4.166 4.0 3.774 3.572 3.333 2.857 2.500 2.222 2.00
21 0.625 4.545 4.167 4.0 3.773 3.571 3.334 2.857 2.500 2.222 2.00
22 4.546 4.166 4.0 3.774 3.572 3.333 2.857 2.500 2.222 2.00
23 0.568 4.167 4.0 3.773 3.571 3.334 2.857 2.500 2.222 2.00
24 4.166 4.0 3.774 3.572 3.333 2.857 2.500 2.222 2.00
25 0.521 4.0 3.773 3.571 3.334 2.857 2.500 2.222 2.00
26 0.5 3.774 3.572 3.333 2.857 2.500 2.223 2.00

27 2.358 3.571 3.334 2.858 2.500 2.222 2.00
28 3.572 3.333 2.857 2.500 2.223 2.00
29 0.446 3.334 2.858 2.500 2.222 2.00
30 3.333 2.857 2.500 2.223 2.00
31 0.417 2.858 2.500 2.222 2.00

32 2.857 2.500 2.223 2.00
33 2.858 2.500 2.222 2.00
34 2.857 2.500 2.223 2.00
35 2.858 2.500 2.222 2.00
36 0.357 2.500 2.223 2.00

37 2.500 2.222 2.00
38 2.500 2.223 2.00
39 2.500 2.222 2.00
40 2.500 2.223 2.00
41 0.312 2.222 2.00

42 2.223 2.00
43 2.222 2.00
44 2.223 2.00
45 2.222 2.00
46 0.278 2.00
47–50 2.00
51 0.25
Page 76

Placed in Service in Second Quarter
Year
2.5 3 3.5 4 5 6 6.5 7 7.5 8 8.5 9 9.5
1 25.0% 20.83% 17.86% 15.63% 12.5% 10.42% 9.62% 8.93% 8.33% 7.81% 7.35% 6.94% 6.58%
2 40.0 33.33 28.57 25.00 20.0 16.67 15.38 14.29 13.33 12.50 11.77 11.11 10.53
3 35.0 33.34 28.57 25.00 20.0 16.67 15.38 14.28 13.33 12.50 11.76 11.11 10.53
4 12.50 25.00 25.00 20.0 16.66 15.39 14.29 13.34 12.50 11.77 11.11 10.53
5 9.37 20.0 16.67 15.38 14.28 13.33 12.50 11.76 11.11 10.52
6 7.5 16.66 15.39 14.29 13.34 12.50 11.77 11.11 10.53

7 6.25 13.46 14.28 13.33 12.50 11.76 11.11 10.52
8 5.36 11.67 12.50 11.77 11.12 10.53
9 4.69 10.29 11.11 10.52
10 4.17 9.21

Year
10 10.5 11 11.5 12 12.5 13 13.5 14 15 16 16.5 17
1 6.25% 5.95% 5.68% 5.43% 5.21% 5.0% 4.81% 4.63% 4.46% 4.17% 3.91% 3.79% 3.68%
2 10.00 9.52 9.09 8.70 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
3 10.00 9.52 9.09 8.70 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
4 10.00 9.53 9.09 8.70 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
5 10.00 9.52 9.09 8.69 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
6 10.00 9.53 9.09 8.70 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
7 10.00 9.52 9.09 8.69 8.34 8.0 7.69 7.41 7.15 6.66 6.25 6.06 5.88
8 10.00 9.53 9.09 8.70 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
9 10.00 9.52 9.09 8.69 8.34 8.0 7.69 7.40 7.15 6.66 6.25 6.06 5.88
10 10.00 9.53 9.09 8.70 8.33 8.0 7.70 7.41 7.14 6.67 6.25 6.06 5.88
11 3.75 8.33 9.10 8.69 8.34 8.0 7.69 7.40 7.15 6.66 6.25 6.06 5.88
12 3.41 7.61 8.33 8.0 7.70 7.41 7.14 6.67 6.25 6.06 5.89
13 3.13 7.0 7.69 7.40 7.15 6.66 6.25 6.06 5.88
14 2.89 6.48 7.14 6.67 6.25 6.06 5.89
15 2.68 6.66 6.25 6.06 5.88
16 2.50 6.25 6.06 5.89

17 2.34 5.31 5.88
18 2.21
Page 77

Year
18 19 20 22 24 25 26.5 28 30 35 40 45 50
1 3.47% 3.29% 3.125% 2.841% 2.604% 2.5% 2.358% 2.232% 2.083% 1.786% 1.563% 1.389% 1.25%
2 5.56 5.26 5.000 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
3 5.56 5.26 5.000 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
4 5.56 5.26 5.000 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
5 5.55 5.26 5.000 4.546 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
6 5.56 5.26 5.000 4.545 4.167 4.0 3.774 3.572 3.333 2.857 2.500 2.222 2.00
7 5.55 5.26 5.000 4.546 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
8 5.56 5.26 5.000 4.545 4.167 4.0 3.773 3.572 3.333 2.857 2.500 2.222 2.00
9 5.55 5.27 5.000 4.546 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
10 5.56 5.26 5.000 4.545 4.167 4.0 3.773 3.572 3.333 2.857 2.500 2.222 2.00
11 5.55 5.27 5.000 4.546 4.166 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
12 5.56 5.26 5.000 4.545 4.167 4.0 3.773 3.572 3.334 2.857 2.500 2.222 2.00
13 5.55 5.27 5.000 4.546 4.166 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
14 5.56 5.26 5.000 4.545 4.167 4.0 3.773 3.572 3.334 2.857 2.500 2.222 2.00
15 5.55 5.27 5.000 4.546 4.166 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
16 5.56 5.26 5.000 4.545 4.167 4.0 3.773 3.572 3.334 2.857 2.500 2.222 2.00
17 5.55 5.27 5.000 4.546 4.166 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
18 5.56 5.26 5.000 4.545 4.167 4.0 3.773 3.572 3.334 2.857 2.500 2.222 2.00
19 2.08 5.27 5.000 4.546 4.166 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
20 1.97 5.000 4.545 4.167 4.0 3.773 3.572 3.334 2.857 2.500 2.222 2.00
21 1.875 4.546 4.166 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
22 4.545 4.167 4.0 3.773 3.572 3.334 2.857 2.500 2.222 2.00
23 1.705 4.166 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
24 4.167 4.0 3.773 3.572 3.334 2.857 2.500 2.222 2.00
25 1.562 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
26 1.5 3.773 3.572 3.334 2.857 2.500 2.222 2.00

27 3.302 3.571 3.333 2.857 2.500 2.223 2.00
28 3.572 3.334 2.858 2.500 2.222 2.00
29 1.339 3.333 2.857 2.500 2.223 2.00
30 3.334 2.858 2.500 2.222 2.00
31 1.250 2.857 2.500 2.223 2.00

32 2.858 2.500 2.222 2.00
33 2.857 2.500 2.223 2.00
34 2.858 2.500 2.222 2.00
35 2.857 2.500 2.223 2.00
36 1.072 2.500 2.222 2.00

37 2.500 2.223 2.00
38 2.500 2.222 2.00
39 2.500 2.223 2.00
40 2.500 2.222 2.00
41 0.937 2.223 2.00

42 2.222 2.00
43 2.223 2.00
44 2.222 2.00
45 2.223 2.00
46 0.833 2.00
47–50 2.00
51 0.75
Page 78

Placed in Service in Third Quarter
Year
2.5 3 3.5 4 5 6 6.5 7 7.5 8 8.5 9 9.5
1 15.0% 12.50% 10.71% 9.38% 7.5% 6.25% 5.77% 5.36% 5.00% 4.69% 4.41% 4.17% 3.95%
2 40.0 33.33 28.57 25.00 20.0 16.67 15.38 14.29 13.33 12.50 11.76 11.11 10.53
3 40.0 33.34 28.57 25.00 20.0 16.67 15.39 14.28 13.33 12.50 11.77 11.11 10.53
4 5.0 20.83 28.58 25.00 20.0 16.66 15.38 14.29 13.33 12.50 11.76 11.11 10.52
5 3.57 15.62 20.0 16.67 15.39 14.28 13.34 12.50 11.77 11.11 10.53
6 12.5 16.66 15.38 14.29 13.33 12.50 11.76 11.11 10.52

7 10.42 15.39 14.28 13.34 12.50 11.77 11.11 10.53
8 1.92 8.93 13.33 12.50 11.76 11.11 10.52
9 1.67 7.81 11.77 11.11 10.53
10 1.47 6.95 10.52
11 1.32

Year
10 10.5 11 11.5 12 12.5 13 13.5 14 15 16 16.5 17
1 3.75% 3.57% 3.41% 3.26% 3.13% 3.0% 2.88% 2.78% 2.68% 2.50% 2.34% 2.27% 2.21%
2 10.00 9.52 9.09 8.70 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
3 10.00 9.52 9.09 8.70 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
4 10.00 9.52 9.09 8.69 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
5 10.00 9.53 9.09 8.70 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
6 10.00 9.52 9.09 8.69 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
7 10.00 9.53 9.09 8.70 8.34 8.0 7.69 7.41 7.14 6.66 6.25 6.06 5.88
8 10.00 9.52 9.09 8.69 8.33 8.0 7.70 7.40 7.14 6.67 6.25 6.06 5.88
9 10.00 9.53 9.09 8.70 8.34 8.0 7.69 7.41 7.15 6.66 6.25 6.06 5.88
10 10.00 9.52 9.09 8.69 8.33 8.0 7.70 7.40 7.14 6.67 6.25 6.06 5.88
11 6.25 9.53 9.10 8.70 8.34 8.0 7.69 7.41 7.15 6.66 6.25 6.06 5.88
12 1.19 5.68 8.69 8.33 8.0 7.70 7.40 7.14 6.67 6.25 6.06 5.89
13 1.09 5.21 8.0 7.69 7.41 7.15 6.66 6.25 6.06 5.88
14 1.0 4.81 7.40 7.14 6.67 6.25 6.06 5.89
15 0.93 4.47 6.66 6.25 6.06 5.88
16 4.17 6.25 6.07 5.89

17 3.91 6.06 5.88
18 0.76 3.68
Page 79

Year
18 19 20 22 24 25 26.5 28 30 35 40 45 50
1 2.08% 1.97% 1.875% 1.705% 1.563% 1.5% 1.415% 1.339% 1.250% 1.071% 0.938% 0.833% 0.75%
2 5.56 5.26 5.000 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
3 5.56 5.26 5.000 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
4 5.56 5.26 5.000 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
5 5.55 5.26 5.000 4.546 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
6 5.56 5.26 5.000 4.545 4.167 4.0 3.774 3.572 3.333 2.857 2.500 2.222 2.00
7 5.55 5.26 5.000 4.546 4.167 4.0 3.773 3.571 3.333 2.857 2.500 2.222 2.00
8 5.56 5.26 5.000 4.545 4.167 4.0 3.774 3.572 3.333 2.857 2.500 2.222 2.00
9 5.55 5.27 5.000 4.546 4.166 4.0 3.773 3.571 3.333 2.857 2.500 2.222 2.00
10 5.56 5.26 5.000 4.545 4.167 4.0 3.774 3.572 3.333 2.857 2.500 2.222 2.00
11 5.55 5.27 5.000 4.546 4.166 4.0 3.773 3.571 3.333 2.857 2.500 2.222 2.00
12 5.56 5.26 5.000 4.545 4.167 4.0 3.774 3.572 3.334 2.857 2.500 2.222 2.00
13 5.55 5.27 5.000 4.546 4.166 4.0 3.773 3.571 3.333 2.857 2.500 2.222 2.00
14 5.56 5.26 5.000 4.545 4.167 4.0 3.774 3.572 3.334 2.857 2.500 2.222 2.00
15 5.55 5.27 5.000 4.546 4.166 4.0 3.773 3.571 3.333 2.857 2.500 2.222 2.00
16 5.56 5.26 5.000 4.545 4.167 4.0 3.774 3.572 3.334 2.857 2.500 2.222 2.00
17 5.55 5.27 5.000 4.546 4.166 4.0 3.773 3.571 3.333 2.857 2.500 2.222 2.00
18 5.56 5.26 5.000 4.545 4.167 4.0 3.774 3.572 3.334 2.857 2.500 2.222 2.00
19 3.47 5.27 5.000 4.546 4.166 4.0 3.773 3.571 3.333 2.857 2.500 2.222 2.00
20 3.29 5.000 4.545 4.167 4.0 3.774 3.572 3.334 2.857 2.500 2.222 2.00
21 3.125 4.546 4.166 4.0 3.773 3.571 3.333 2.857 2.500 2.222 2.00
22 4.545 4.167 4.0 3.774 3.572 3.334 2.857 2.500 2.222 2.00
23 2.841 4.166 4.0 3.773 3.571 3.333 2.857 2.500 2.222 2.00
24 4.167 4.0 3.774 3.572 3.334 2.857 2.500 2.222 2.00
25 2.604 4.0 3.773 3.571 3.333 2.857 2.500 2.222 2.00
26 2.5 3.774 3.572 3.334 2.858 2.500 2.222 2.00

27 3.773 3.571 3.333 2.857 2.500 2.223 2.00
28 0.472 3.572 3.334 2.858 2.500 2.222 2.00
29 2.232 3.333 2.857 2.500 2.223 2.00
30 3.334 2.858 2.500 2.222 2.00
31 2.083 2.857 2.500 2.223 2.00

32 2.858 2.500 2.222 2.00
33 2.857 2.500 2.223 2.00
34 2.858 2.500 2.222 2.00
35 2.857 2.500 2.223 2.00
36 1.786 2.500 2.222 2.00

37 2.500 2.223 2.00
38 2.500 2.222 2.00
39 2.500 2.223 2.00
40 2.500 2.222 2.00
41 1.562 2.223 2.00

42 2.222 2.00
43 2.223 2.00
44 2.222 2.00
45 2.223 2.00
46 1.389 2.00
47–50 2.00
51 1.25
Page 80

Placed in Service in Fourth Quarter
Year
2.5 3 3.5 4 5 6 6.5 7 7.5 8 8.5 9 9.5
1 5.0% 4.17% 3.57% 3.13% 2.5% 2.08% 1.92% 1.79% 1.67% 1.56% 1.47% 1.39% 1.32%
2 40.0 33.33 28.57 25.00 20.0 16.67 15.39 14.29 13.33 12.50 11.76 11.11 10.53
3 40.0 33.33 28.57 25.00 20.0 16.67 15.38 14.28 13.33 12.50 11.77 11.11 10.53
4 15.0 29.17 28.57 25.00 20.0 16.67 15.39 14.29 13.33 12.50 11.76 11.11 10.52
5 10.72 21.87 20.0 16.66 15.38 14.28 13.33 12.50 11.77 11.11 10.53
6 17.5 16.67 15.39 14.29 13.34 12.50 11.76 11.11 10.52

7 14.58 15.38 14.28 13.33 12.50 11.77 11.11 10.53
8 5.77 12.50 13.34 12.50 11.76 11.11 10.52
9 5.00 10.94 11.77 11.11 10.53
10 4.41 9.73 10.52
11 3.95

Year
10 10.5 11 11.5 12 12.5 13 13.5 14 15 16 16.5 17
1 1.25% 1.19% 1.14% 1.09% 1.04% 1.0% 0.96% 0.93% 0.89% 0.83% 0.78% 0.76% 0.74%
2 10.00 9.52 9.09 8.70 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
3 10.00 9.52 9.09 8.69 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
4 10.00 9.52 9.09 8.70 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
5 10.00 9.53 9.09 8.69 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
6 10.00 9.52 9.09 8.70 8.34 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
7 10.00 9.53 9.09 8.69 8.33 8.0 7.69 7.41 7.14 6.67 6.25 6.06 5.88
8 10.00 9.52 9.09 8.70 8.34 8.0 7.69 7.40 7.15 6.66 6.25 6.06 5.88
9 10.00 9.53 9.09 8.69 8.33 8.0 7.70 7.41 7.14 6.67 6.25 6.06 5.88
10 10.00 9.52 9.09 8.70 8.34 8.0 7.69 7.40 7.15 6.66 6.25 6.06 5.88
11 8.75 9.53 9.09 8.69 8.33 8.0 7.70 7.41 7.14 6.67 6.25 6.06 5.88
12 3.57 7.96 8.70 8.34 8.0 7.69 7.40 7.15 6.66 6.25 6.06 5.89
13 3.26 7.29 8.0 7.70 7.41 7.14 6.67 6.25 6.06 5.88
14 3.0 6.73 7.40 7.15 6.66 6.25 6.06 5.89
15 2.78 6.25 6.67 6.25 6.06 5.88
16 5.83 6.25 6.06 5.89

17 5.47 6.07 5.88
18 2.27 5.15
Page 81

Year
18 19 20 22 24 25 26.5 28 30 35 40 45 50
1 0.69% 0.66% 0.625% 0.568% 0.521% 0.5% 0.472% 0.446% 0.417% 0.357% 0.313% 0.278% 0.25%
2 5.56 5.26 5.000 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
3 5.56 5.26 5.000 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
4 5.56 5.26 5.000 4.546 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
5 5.55 5.26 5.000 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
6 5.56 5.26 5.000 4.546 4.167 4.0 3.773 3.572 3.333 2.857 2.500 2.222 2.00
7 5.55 5.26 5.000 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
8 5.56 5.26 5.000 4.546 4.167 4.0 3.773 3.572 3.333 2.857 2.500 2.222 2.00
9 5.55 5.26 5.000 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
10 5.56 5.27 5.000 4.546 4.166 4.0 3.773 3.572 3.333 2.857 2.500 2.222 2.00
11 5.55 5.26 5.000 4.545 4.167 4.0 3.774 3.571 3.333 2.857 2.500 2.222 2.00
12 5.56 5.27 5.000 4.546 4.166 4.0 3.773 3.572 3.333 2.857 2.500 2.222 2.00
13 5.55 5.26 5.000 4.545 4.167 4.0 3.774 3.571 3.334 2.857 2.500 2.222 2.00
14 5.56 5.27 5.000 4.546 4.166 4.0 3.773 3.572 3.333 2.857 2.500 2.222 2.00
15 5.55 5.26 5.000 4.545 4.167 4.0 3.774 3.571 3.334 2.857 2.500 2.222 2.00
16 5.56 5.27 5.000 4.546 4.166 4.0 3.773 3.572 3.333 2.857 2.500 2.222 2.00
17 5.55 5.26 5.000 4.545 4.167 4.0 3.774 3.571 3.334 2.857 2.500 2.222 2.00
18 5.56 5.27 5.000 4.546 4.166 4.0 3.773 3.572 3.333 2.857 2.500 2.222 2.00
19 4.86 5.26 5.000 4.545 4.167 4.0 3.774 3.571 3.334 2.857 2.500 2.222 2.00
20 4.61 5.000 4.546 4.166 4.0 3.773 3.572 3.333 2.857 2.500 2.222 2.00
21 4.375 4.545 4.167 4.0 3.774 3.571 3.334 2.857 2.500 2.222 2.00
22 4.546 4.166 4.0 3.773 3.572 3.333 2.857 2.500 2.222 2.00
23 3.977 4.167 4.0 3.774 3.571 3.334 2.857 2.500 2.222 2.00
24 4.166 4.0 3.773 3.572 3.333 2.857 2.500 2.222 2.00
25 3.646 4.0 3.774 3.571 3.334 2.857 2.500 2.222 2.00
26 3.5 3.773 3.572 3.333 2.857 2.500 2.222 2.00

27 3.774 3.571 3.334 2.858 2.500 2.222 2.00
28 1.415 3.572 3.333 2.857 2.500 2.223 2.00
29 3.125 3.334 2.858 2.500 2.222 2.00
30 3.333 2.857 2.500 2.223 2.00
31 2.917 2.858 2.500 2.222 2.00

32 2.857 2.500 2.223 2.00
33 2.858 2.500 2.222 2.00
34 2.857 2.500 2.223 2.00
35 2.858 2.500 2.222 2.00
36 2.500 2.500 2.223 2.00

37 2.500 2.222 2.00
38 2.500 2.223 2.00
39 2.500 2.222 2.00
40 2.500 2.223 2.00
41 2.187 2.222 2.00

42 2.223 2.00
43 2.222 2.00
44 2.223 2.00
45 2.222 2.00
46 1.945 2.00
47–50 2.00
51 1.75
Page 82
Table A-13. Straight Line

Year
1 2 3 4 5 6 7 8 9 10 11 12
1 2.396% 2.188% 1.979% 1.771% 1.563% 1.354% 1.146% 0.938% 0.729% 0.521% 0.313% 0.104%
2–40 2.500 2.500 2.500 2.500 2.500 2.500 2.500 2.500 2.500 2.500 2.500 2.500
41 0.104 0.312 0.521 0.729 0.937 1.146 1.354 1.562 1.771 1.979 2.187 2.396
Table A-14. 150% Declining Balance Method

Year
2.5 3 3.5 4 5 6 6.5 7 7.5 8 8.5 9 9.5
1 30.0% 25.0% 21.43% 18.75% 15.00% 12.50% 11.54% 10.71% 10.00% 9.38% 8.82% 8.33% 7.89%
2 42.0 37.5 33.67 30.47 25.50 21.88 20.41 19.13 18.00 16.99 16.09 15.28 14.54
3 28.0 25.0 22.45 20.31 17.85 16.41 15.70 15.03 14.40 13.81 13.25 12.73 12.25
4 12.5 22.45 20.31 16.66 14.06 13.09 12.25 11.52 11.22 10.91 10.61 10.31
5 10.16 16.66 14.06 13.09 12.25 11.52 10.80 10.19 9.65 9.17
6 8.33 14.06 13.09 12.25 11.52 10.80 10.19 9.64 9.17

7 7.03 13.08 12.25 11.52 10.80 10.18 9.65 9.17
8 6.13 11.52 10.80 10.19 9.64 9.17
9 5.40 10.18 9.65 9.17
10 4.82 9.16

Year
10 10.5 11 11.5 12 12.5 13 13.5 14 15 16 16.5 17
1 7.50% 7.14% 6.82% 6.52% 6.25% 6.00% 5.77% 5.56% 5.36% 5.00% 4.69% 4.55% 4.41%
2 13.88 13.27 12.71 12.19 11.72 11.28 10.87 10.49 10.14 9.50 8.94 8.68 8.43
3 11.79 11.37 10.97 10.60 10.25 9.93 9.62 9.33 9.05 8.55 8.10 7.89 7.69
4 10.02 9.75 9.48 9.22 8.97 8.73 8.51 8.29 8.08 7.70 7.34 7.17 7.01
5 8.74 8.35 8.18 8.02 7.85 7.69 7.53 7.37 7.22 6.93 6.65 6.52 6.39
6 8.74 8.35 7.98 7.64 7.33 7.05 6.79 6.55 6.44 6.23 6.03 5.93 5.83
7 8.74 8.35 7.97 7.64 7.33 7.05 6.79 6.55 6.32 5.90 5.55 5.39 5.32
8 8.74 8.35 7.98 7.63 7.33 7.05 6.79 6.55 6.32 5.90 5.55 5.39 5.23
9 8.74 8.36 7.97 7.64 7.33 7.04 6.79 6.55 6.32 5.91 5.55 5.39 5.23
10 8.74 8.35 7.98 7.63 7.33 7.05 6.79 6.55 6.32 5.90 5.55 5.39 5.23
11 4.37 8.36 7.97 7.64 7.32 7.04 6.79 6.55 6.32 5.91 5.55 5.39 5.23
12 3.99 7.63 7.33 7.05 6.78 6.55 6.32 5.90 5.55 5.39 5.23
13 3.66 7.04 6.79 6.56 6.32 5.91 5.54 5.38 5.23
14 3.39 6.55 6.31 5.90 5.55 5.39 5.23
15 3.16 5.91 5.54 5.38 5.23
16 2.95 5.55 5.39 5.23

17 2.77 5.38 5.23
18 2.62
Page 83

Year
18 19 20 22 24 25 26.5 28 30 35 40 45 50
1 4.17% 3.95% 3.750% 3.409% 3.125% 3.000% 2.830% 2.679% 2.500% 2.143% 1.875% 1.667% 1.500%
2 7.99 7.58 7.219 6.586 6.055 5.820 5.500 5.214 4.875 4.194 3.680 3.278 2.955
3 7.32 6.98 6.677 6.137 5.676 5.471 5.189 4.934 4.631 4.014 3.542 3.169 2.866
4 6.71 6.43 6.177 5.718 5.322 5.143 4.895 4.670 4.400 3.842 3.409 3.063 2.780
5 6.15 5.93 5.713 5.328 4.989 4.834 4.618 4.420 4.180 3.677 3.281 2.961 2.697
6 5.64 5.46 5.285 4.965 4.677 4.544 4.357 4.183 3.971 3.520 3.158 2.862 2.616
7 5.17 5.03 4.888 4.627 4.385 4.271 4.110 3.959 3.772 3.369 3.040 2.767 2.538
8 4.94 4.69 4.522 4.311 4.111 4.015 3.877 3.747 3.584 3.225 2.926 2.674 2.461
9 4.94 4.69 4.462 4.063 3.854 3.774 3.658 3.546 3.404 3.086 2.816 2.585 2.388
10 4.94 4.69 4.461 4.063 3.729 3.584 3.451 3.356 3.234 2.954 2.710 2.499 2.316
11 4.94 4.69 4.462 4.063 3.729 3.583 3.383 3.205 3.072 2.828 2.609 2.416 2.246
12 4.95 4.69 4.461 4.063 3.729 3.584 3.383 3.205 2.994 2.706 2.511 2.335 2.179
13 4.94 4.69 4.462 4.064 3.730 3.583 3.383 3.205 2.994 2.590 2.417 2.257 2.114
14 4.95 4.69 4.461 4.063 3.729 3.584 3.383 3.205 2.994 2.571 2.326 2.182 2.050
15 4.94 4.69 4.462 4.064 3.730 3.583 3.383 3.205 2.994 2.571 2.253 2.110 1.989
16 4.95 4.69 4.461 4.063 3.729 3.584 3.383 3.205 2.994 2.571 2.253 2.039 1.929
17 4.94 4.69 4.462 4.064 3.730 3.583 3.383 3.205 2.994 2.571 2.253 2.005 1.871
18 4.95 4.70 4.461 4.063 3.729 3.584 3.383 3.205 2.994 2.571 2.253 2.005 1.815
19 2.47 4.69 4.462 4.064 3.730 3.583 3.383 3.205 2.994 2.571 2.253 2.005 1.806
20 2.35 4.461 4.063 3.729 3.584 3.384 3.205 2.993 2.571 2.253 2.005 1.806
21 2.231 4.064 3.730 3.583 3.383 3.205 2.994 2.571 2.253 2.005 1.806
22 4.063 3.729 3.584 3.384 3.205 2.993 2.571 2.253 2.005 1.806
23 2.032 3.730 3.583 3.383 3.205 2.994 2.571 2.253 2.005 1.806
24 3.729 3.584 3.384 3.205 2.993 2.571 2.253 2.004 1.806
25 1.865 3.583 3.383 3.205 2.994 2.571 2.253 2.005 1.806
26 1.792 3.384 3.205 2.993 2.571 2.253 2.004 1.806

27 3.383 3.205 2.994 2.571 2.253 2.005 1.806
28 3.205 2.993 2.572 2.253 2.004 1.806
29 1.602 2.994 2.571 2.253 2.005 1.806
30 2.993 2.572 2.253 2.004 1.806
31 1.497 2.571 2.253 2.005 1.806

32 2.572 2.253 2.004 1.806
33 2.571 2.252 2.005 1.806
34 2.572 2.253 2.004 1.806
35 2.571 2.252 2.005 1.806
36 1.286 2.253 2.004 1.806

37 2.252 2.005 1.806
38 2.253 2.004 1.806
39 2.252 2.005 1.806
40 2.253 2.004 1.806
41 1.126 2.005 1.806

42 2.004 1.805
43 2.005 1.806
44 2.004 1.805
45 2.005 1.806
46 1.002 1.805
47 1.806
48 1.805
49 1.806
50 1.805
51 0.903
Page 84

Property Placed in Service in First Quarter
Year
2.5 3 3.5 4 5 6 6.5 7 7.5 8 8.5 9 9.5
1 52.50% 43.75% 37.50% 32.81% 26.25% 21.88% 20.19% 18.75% 17.50% 16.41% 15.44% 14.58% 13.82%
2 29.23 28.13 26.79 25.20 22.13 19.53 18.42 17.41 16.50 15.67 14.92 14.24 13.61
3 18.27 25.00 21.98 19.76 16.52 14.65 14.17 13.68 13.20 12.74 12.29 11.86 11.46
4 3.12 13.73 19.76 16.52 14.06 13.03 12.16 11.42 10.77 10.20 9.89 9.65
5 2.47 16.52 14.06 13.02 12.16 11.42 10.77 10.19 9.64 9.15
6 2.06 14.06 13.03 12.16 11.41 10.76 10.20 9.65 9.15

7 1.76 8.14 12.16 11.42 10.77 10.19 9.64 9.15
8 1.52 7.13 10.76 10.20 9.65 9.15
9 1.35 6.37 9.64 9.14
10 1.21 5.72

Year
10 10.5 11 11.5 12 12.5 13 13.5 14 15 16 16.5 17
1 13.13% 12.50% 11.93% 11.41% 10.94% 10.50% 10.10% 9.72% 9.38% 8.75% 8.20% 7.95% 7.72%
2 13.03 12.50 12.01 11.56 11.13 10.74 10.37 10.03 9.71 9.13 8.61 8.37 8.14
3 11.08 10.71 10.37 10.05 9.74 9.45 9.18 8.92 8.67 8.21 7.80 7.61 7.42
4 9.41 9.18 8.96 8.74 8.52 8.32 8.12 7.93 7.74 7.39 7.07 6.92 6.77
5 8.71 8.32 7.96 7.64 7.46 7.32 7.18 7.04 6.91 6.65 6.41 6.29 6.17
6 8.71 8.32 7.96 7.64 7.33 7.04 6.78 6.53 6.31 5.99 5.80 5.71 5.63
7 8.71 8.32 7.96 7.64 7.33 7.04 6.77 6.54 6.31 5.90 5.54 5.38 5.23
8 8.71 8.32 7.96 7.64 7.33 7.04 6.78 6.53 6.31 5.91 5.54 5.38 5.23
9 8.71 8.32 7.96 7.64 7.33 7.04 6.77 6.54 6.31 5.90 5.54 5.38 5.23
10 8.71 8.31 7.97 7.63 7.32 7.04 6.78 6.53 6.31 5.91 5.54 5.38 5.23
11 1.09 5.20 7.96 7.64 7.33 7.04 6.77 6.54 6.31 5.90 5.54 5.38 5.23
12 1.00 4.77 7.32 7.03 6.78 6.53 6.31 5.91 5.54 5.38 5.22
13 0.92 4.40 6.77 6.54 6.32 5.90 5.54 5.38 5.23
14 0.85 4.08 6.31 5.91 5.55 5.38 5.22
15 0.79 5.90 5.54 5.38 5.23
16 0.74 5.55 5.37 5.22

17 0.69 3.36 5.23
18 0.65
Page 85

Year
18 19 20 22 24 25 26.5 28 30 35 40 45 50
1 7.29% 6.91% 6.563% 5.966% 5.469% 5.250% 4.953% 4.688% 4.375% 3.750% 3.281% 2.917% 2.625%
2 7.73 7.35 7.008 6.411 5.908 5.685 5.380 5.106 4.781 4.125 3.627 3.236 2.921
3 7.08 6.77 6.482 5.974 5.539 5.344 5.075 4.832 4.542 3.948 3.491 3.128 2.834
4 6.49 6.23 5.996 5.567 5.193 5.023 4.788 4.574 4.315 3.779 3.360 3.024 2.749
5 5.95 5.74 5.546 5.187 4.868 4.722 4.517 4.329 4.099 3.617 3.234 2.923 2.666
6 5.45 5.29 5.130 4.834 4.564 4.439 4.262 4.097 3.894 3.462 3.113 2.826 2.586
7 5.00 4.87 4.746 4.504 4.279 4.172 4.020 3.877 3.700 3.314 2.996 2.732 2.509
8 4.94 4.69 4.459 4.197 4.011 3.922 3.793 3.669 3.515 3.172 2.884 2.640 2.433
9 4.95 4.69 4.459 4.061 3.761 3.687 3.578 3.473 3.339 3.036 2.776 2.552 2.360
10 4.94 4.69 4.459 4.061 3.729 3.582 3.383 3.287 3.172 2.906 2.671 2.467 2.290
11 4.95 4.69 4.459 4.061 3.729 3.582 3.384 3.204 3.013 2.781 2.571 2.385 2.221
12 4.94 4.69 4.460 4.061 3.730 3.582 3.383 3.204 2.994 2.662 2.475 2.306 2.154
13 4.95 4.69 4.459 4.061 3.729 3.582 3.384 3.204 2.994 2.571 2.382 2.229 2.090
14 4.94 4.69 4.460 4.061 3.730 3.582 3.383 3.204 2.994 2.571 2.293 2.154 2.027
15 4.95 4.68 4.459 4.061 3.729 3.582 3.384 3.204 2.994 2.571 2.252 2.083 1.966
16 4.94 4.69 4.460 4.061 3.730 3.582 3.383 3.204 2.994 2.571 2.252 2.013 1.907
17 4.95 4.68 4.459 4.061 3.729 3.582 3.384 3.204 2.994 2.571 2.253 2.005 1.850
18 4.94 4.69 4.460 4.061 3.730 3.582 3.383 3.204 2.994 2.571 2.252 2.005 1.806
19 0.62 4.68 4.459 4.061 3.729 3.581 3.384 3.204 2.994 2.571 2.253 2.005 1.806
20 0.59 4.460 4.060 3.730 3.582 3.383 3.204 2.994 2.571 2.252 2.005 1.806
21 0.557 4.061 3.729 3.581 3.384 3.203 2.993 2.571 2.253 2.005 1.806
22 4.060 3.730 3.582 3.383 3.204 2.994 2.571 2.252 2.005 1.806
23 0.508 3.729 3.581 3.384 3.203 2.993 2.571 2.253 2.005 1.806
24 3.730 3.582 3.383 3.204 2.994 2.570 2.252 2.005 1.806
25 0.466 3.581 3.384 3.203 2.993 2.571 2.253 2.004 1.806
26 0.448 3.383 3.204 2.994 2.570 2.252 2.005 1.806

27 2.115 3.203 2.993 2.571 2.253 2.004 1.806
28 3.204 2.994 2.570 2.252 2.005 1.805
29 0.400 2.993 2.571 2.253 2.004 1.806
30 2.994 2.570 2.252 2.005 1.805
31 0.374 2.571 2.253 2.004 1.806

32 2.570 2.252 2.005 1.805
33 2.571 2.253 2.004 1.806
34 2.570 2.252 2.005 1.805
35 2.571 2.253 2.004 1.806
36 0.321 2.252 2.005 1.805

37 2.253 2.004 1.806
38 2.252 2.005 1.805
39 2.253 2.004 1.806
40 2.252 2.005 1.805
41 0.282 2.004 1.806

42 2.005 1.805
43 2.004 1.806
44 2.005 1.805
45 2.004 1.806
46 0.251 1.805
47 1.806
48 1.805
49 1.806
50 1.805
51 0.226
Page 86

Property Placed in Service in Second Quarter
Year
2.5 3 3.5 4 5 6 6.5 7 7.5 8 8.5 9 9.5
1 37.50% 31.25% 26.79% 23.44% 18.75% 15.63% 14.42% 13.39% 12.50% 11.72% 11.03% 10.42% 9.87%
2 37.50 34.38 31.38 28.71 24.38 21.09 19.75 18.56 17.50 16.55 15.70 14.93 14.23
3 25.00 25.00 22.31 20.15 17.06 15.82 15.19 14.58 14.00 13.45 12.93 12.44 11.98
4 9.37 19.52 20.15 16.76 14.06 13.07 12.22 11.49 10.93 10.65 10.37 10.09
5 7.55 16.76 14.06 13.07 12.22 11.49 10.82 10.19 9.64 9.16
6 6.29 14.07 13.07 12.22 11.49 10.82 10.19 9.65 9.16

7 5.27 11.43 12.23 11.48 10.83 10.19 9.64 9.16
8 4.58 10.05 10.82 10.20 9.65 9.17
9 4.06 8.92 9.64 9.16
10 3.62 8.02

Year
10 10.5 11 11.5 12 12.5 13 13.5 14 15 16 16.5 17
1 9.38% 8.93% 8.52% 8.15% 7.81% 7.50% 7.21% 6.94% 6.70% 6.25% 5.86% 5.68% 5.51%
2 13.59 13.01 12.47 11.98 11.52 11.10 10.71 10.34 10.00 9.38 8.83 8.57 8.34
3 11.55 11.15 10.77 10.42 10.08 9.77 9.47 9.19 8.92 8.44 8.00 7.80 7.60
4 9.82 9.56 9.31 9.06 8.82 8.60 8.38 8.17 7.97 7.59 7.25 7.09 6.93
5 8.73 8.34 8.04 7.88 7.72 7.56 7.41 7.26 7.12 6.83 6.57 6.44 6.32
6 8.73 8.34 7.98 7.64 7.33 7.04 6.78 6.55 6.35 6.15 5.95 5.86 5.76
7 8.73 8.34 7.98 7.64 7.33 7.04 6.79 6.55 6.32 5.91 5.55 5.38 5.25
8 8.73 8.34 7.98 7.64 7.33 7.05 6.78 6.55 6.32 5.90 5.55 5.39 5.23
9 8.73 8.34 7.99 7.64 7.33 7.04 6.79 6.54 6.32 5.91 5.55 5.38 5.23
10 8.73 8.35 7.98 7.63 7.33 7.05 6.78 6.55 6.32 5.90 5.54 5.39 5.23
11 3.28 7.30 7.99 7.64 7.33 7.04 6.79 6.54 6.32 5.91 5.55 5.38 5.23
12 2.99 6.68 7.32 7.05 6.78 6.55 6.32 5.90 5.54 5.39 5.23
13 2.75 6.16 6.79 6.54 6.32 5.91 5.55 5.38 5.24
14 2.54 5.73 6.33 5.90 5.54 5.39 5.23
15 2.37 5.91 5.55 5.38 5.24
16 2.21 5.54 5.39 5.23

17 2.08 4.71 5.24
18 1.96
Page 87

Year
18 19 20 22 24 25 26.5 28 30 35 40 45 50
1 5.21% 4.93% 4.688% 4.261% 3.906% 3.750% 3.538% 3.348% 3.125% 2.679% 2.344% 2.083% 1.875%
2 7.90 7.51 7.148 6.528 6.006 5.775 5.460 5.178 4.844 4.171 3.662 3.264 2.944
3 7.24 6.91 6.612 6.083 5.631 5.429 5.151 4.900 4.602 3.992 3.525 3.155 2.855
4 6.64 6.37 6.116 5.668 5.279 5.103 4.859 4.638 4.371 3.821 3.393 3.050 2.770
5 6.08 5.86 5.658 5.281 4.949 4.797 4.584 4.389 4.153 3.657 3.265 2.948 2.687
6 5.58 5.40 5.233 4.921 4.639 4.509 4.325 4.154 3.945 3.501 3.143 2.850 2.606
7 5.11 4.98 4.841 4.586 4.349 4.238 4.080 3.932 3.748 3.351 3.025 2.755 2.528
8 4.94 4.69 4.478 4.273 4.078 3.984 3.849 3.721 3.561 3.207 2.912 2.663 2.452
9 4.94 4.69 4.463 4.063 3.823 3.745 3.631 3.522 3.383 3.069 2.802 2.574 2.378
10 4.95 4.69 4.463 4.063 3.729 3.583 3.426 3.333 3.213 2.938 2.697 2.489 2.307
11 4.94 4.69 4.463 4.062 3.729 3.583 3.384 3.205 3.053 2.812 2.596 2.406 2.238
12 4.95 4.69 4.463 4.063 3.729 3.583 3.383 3.205 2.994 2.692 2.499 2.325 2.171
13 4.94 4.69 4.463 4.062 3.730 3.583 3.384 3.205 2.994 2.576 2.405 2.248 2.106
14 4.95 4.69 4.463 4.063 3.729 3.583 3.383 3.205 2.994 2.571 2.315 2.173 2.042
15 4.94 4.69 4.462 4.062 3.730 3.583 3.384 3.205 2.994 2.571 2.253 2.101 1.981
16 4.95 4.69 4.463 4.063 3.729 3.583 3.383 3.204 2.994 2.571 2.253 2.031 1.922
17 4.94 4.69 4.462 4.062 3.730 3.583 3.384 3.205 2.994 2.571 2.253 2.005 1.864
18 4.95 4.69 4.463 4.063 3.729 3.583 3.383 3.204 2.993 2.571 2.253 2.005 1.808
19 1.85 4.69 4.462 4.062 3.730 3.583 3.384 3.205 2.994 2.571 2.253 2.005 1.806
20 1.76 4.463 4.063 3.729 3.583 3.383 3.204 2.993 2.571 2.253 2.005 1.806
21 1.673 4.062 3.730 3.583 3.384 3.205 2.994 2.572 2.253 2.005 1.806
22 4.063 3.729 3.583 3.383 3.204 2.993 2.571 2.253 2.005 1.806
23 1.523 3.730 3.583 3.384 3.205 2.994 2.572 2.253 2.004 1.806
24 3.729 3.582 3.383 3.204 2.993 2.571 2.253 2.005 1.806
25 1.399 3.583 3.384 3.205 2.994 2.572 2.253 2.004 1.806
26 1.343 3.383 3.204 2.993 2.571 2.253 2.005 1.806

27 2.961 3.205 2.994 2.572 2.253 2.004 1.806
28 3.204 2.993 2.571 2.253 2.005 1.806
29 1.202 2.994 2.572 2.253 2.004 1.806
30 2.993 2.571 2.252 2.005 1.806
31 1.123 2.572 2.253 2.004 1.806

32 2.571 2.252 2.005 1.806
33 2.572 2.253 2.004 1.806
34 2.571 2.252 2.005 1.806
35 2.572 2.253 2.004 1.806
36 0.964 2.252 2.005 1.806

37 2.253 2.004 1.806
38 2.252 2.005 1.806
39 2.253 2.004 1.806
40 2.252 2.005 1.806
41 0.845 2.004 1.806

42 2.005 1.806
43 2.004 1.806
44 2.005 1.806
45 2.004 1.805
46 0.752 1.806
47 1.805
48 1.806
49 1.805
50 1.806
51 0.677
Page 88

Property Placed in Service in Third Quarter
Year
2.5 3 3.5 4 5 6 6.5 7 7.5 8 8.5 9 9.5
1 22.50% 18.75% 16.07% 14.06% 11.25% 9.38% 8.65% 8.04% 7.50% 7.03% 6.62% 6.25% 5.92%
2 46.50 40.63 35.97 32.23 26.63 22.66 21.08 19.71 18.50 17.43 16.48 15.63 14.85
3 27.56 25.00 22.57 20.46 18.64 16.99 16.22 15.48 14.80 14.16 13.57 13.02 12.51
4 3.44 15.62 22.57 20.46 16.56 14.06 13.10 12.27 11.84 11.51 11.18 10.85 10.53
5 2.82 12.79 16.57 14.06 13.10 12.28 11.48 10.78 10.18 9.64 9.17
6 10.35 14.06 13.11 12.27 11.48 10.78 10.17 9.65 9.17

7 8.79 13.10 12.28 11.48 10.78 10.18 9.64 9.18
8 1.64 7.67 11.48 10.79 10.17 9.65 9.17
9 1.44 6.74 10.18 9.64 9.18
10 1.27 6.03 9.17
11 1.15

Year
10 10.5 11 11.5 12 12.5 13 13.5 14 15 16 16.5 17
1 5.63% 5.36% 5.11% 4.89% 4.69% 4.50% 4.33% 4.17% 4.02% 3.75% 3.52% 3.41% 3.31%
2 14.16 13.52 12.94 12.41 11.91 11.46 11.04 10.65 10.28 9.63 9.05 8.78 8.53
3 12.03 11.59 11.18 10.79 10.43 10.08 9.77 9.46 9.18 8.66 8.20 7.98 7.78
4 10.23 9.93 9.65 9.38 9.12 8.88 8.64 8.41 8.20 7.80 7.43 7.26 7.09
5 8.75 8.51 8.33 8.16 7.98 7.81 7.64 7.48 7.32 7.02 6.73 6.60 6.47
6 8.75 8.34 7.97 7.63 7.33 7.05 6.79 6.65 6.54 6.31 6.10 6.00 5.90
7 8.75 8.34 7.97 7.63 7.33 7.05 6.79 6.55 6.31 5.90 5.55 5.45 5.38
8 8.74 8.34 7.97 7.63 7.33 7.05 6.79 6.54 6.31 5.90 5.55 5.38 5.23
9 8.75 8.34 7.97 7.63 7.33 7.05 6.79 6.55 6.32 5.91 5.55 5.39 5.23
10 8.74 8.34 7.97 7.63 7.32 7.05 6.79 6.54 6.31 5.90 5.55 5.38 5.23
11 5.47 8.35 7.96 7.63 7.33 7.05 6.79 6.55 6.32 5.91 5.55 5.39 5.23
12 1.04 4.98 7.64 7.32 7.04 6.80 6.54 6.31 5.90 5.55 5.38 5.23
13 0.95 4.58 7.05 6.79 6.55 6.32 5.91 5.55 5.39 5.22
14 0.88 4.25 6.54 6.31 5.90 5.55 5.38 5.23
15 0.82 3.95 5.91 5.55 5.39 5.22
16 3.69 5.55 5.38 5.23

17 3.47 5.39 5.22
18 0.67 3.27
Page 89

Year
18 19 20 22 24 25 26.5 28 30 35 40 45 50
1 3.13% 2.96% 2.813% 2.557% 2.344% 2.250% 2.123% 2.009% 1.875% 1.607% 1.406% 1.250% 1.125%
2 8.07 7.66 7.289 6.644 6.104 5.865 5.540 5.250 4.906 4.217 3.697 3.292 2.966
3 7.40 7.06 6.742 6.191 5.722 5.513 5.227 4.968 4.661 4.036 3.559 3.182 2.877
4 6.78 6.50 6.237 5.769 5.364 5.182 4.931 4.702 4.428 3.863 3.425 3.076 2.791
5 6.22 5.99 5.769 5.375 5.029 4.871 4.652 4.450 4.207 3.698 3.297 2.973 2.707
6 5.70 5.51 5.336 5.009 4.715 4.579 4.388 4.212 3.996 3.539 3.173 2.874 2.626
7 5.23 5.08 4.936 4.667 4.420 4.304 4.140 3.986 3.796 3.387 3.054 2.778 2.547
8 4.94 4.69 4.566 4.349 4.144 4.046 3.906 3.773 3.607 3.242 2.940 2.686 2.471
9 4.94 4.69 4.460 4.064 3.885 3.803 3.685 3.571 3.426 3.103 2.829 2.596 2.397
10 4.94 4.69 4.460 4.064 3.729 3.584 3.476 3.379 3.255 2.970 2.723 2.510 2.325
11 4.94 4.69 4.460 4.064 3.730 3.584 3.383 3.205 3.092 2.843 2.621 2.426 2.255
12 4.95 4.69 4.460 4.064 3.729 3.584 3.383 3.205 2.994 2.721 2.523 2.345 2.187
13 4.94 4.69 4.461 4.064 3.730 3.584 3.383 3.205 2.994 2.605 2.428 2.267 2.122
14 4.95 4.69 4.460 4.064 3.729 3.584 3.383 3.205 2.994 2.571 2.337 2.192 2.058
15 4.94 4.70 4.461 4.064 3.730 3.584 3.383 3.205 2.994 2.571 2.253 2.118 1.996
16 4.95 4.69 4.460 4.064 3.729 3.584 3.383 3.206 2.994 2.571 2.253 2.048 1.937
17 4.94 4.70 4.461 4.064 3.730 3.584 3.383 3.205 2.994 2.571 2.253 2.005 1.878
18 4.95 4.69 4.460 4.065 3.729 3.584 3.383 3.206 2.994 2.571 2.253 2.005 1.822
19 3.09 4.70 4.461 4.064 3.730 3.584 3.383 3.205 2.994 2.571 2.253 2.005 1.806
20 2.93 4.460 4.065 3.729 3.584 3.383 3.206 2.993 2.571 2.253 2.005 1.806
21 2.788 4.064 3.730 3.585 3.383 3.205 2.994 2.571 2.253 2.005 1.806
22 4.065 3.729 3.584 3.383 3.206 2.993 2.571 2.253 2.005 1.806
23 2.540 3.730 3.585 3.383 3.205 2.994 2.571 2.253 2.005 1.806
24 3.729 3.584 3.383 3.206 2.993 2.571 2.253 2.005 1.806
25 2.331 3.585 3.382 3.205 2.994 2.571 2.253 2.004 1.806
26 2.240 3.383 3.206 2.993 2.571 2.253 2.005 1.806

27 3.382 3.205 2.994 2.571 2.253 2.004 1.806
28 0.423 3.206 2.993 2.571 2.253 2.005 1.806
29 2.003 2.994 2.571 2.253 2.004 1.806
30 2.993 2.571 2.253 2.005 1.806
31 1.871 2.571 2.253 2.004 1.806

32 2.571 2.253 2.005 1.806
33 2.571 2.253 2.004 1.806
34 2.571 2.253 2.005 1.806
35 2.571 2.253 2.004 1.806
36 1.607 2.253 2.005 1.806

37 2.253 2.004 1.805
38 2.254 2.005 1.806
39 2.253 2.004 1.805
40 2.254 2.005 1.806
41 1.408 2.004 1.805

42 2.005 1.806
43 2.004 1.805
44 2.005 1.806
45 2.004 1.805
46 1.253 1.806
47 1.805
48 1.806
49 1.805
50 1.806
51 1.128
Page 90

Property Placed in Service in Fourth Quarter
Year
2.5 3 3.5 4 5 6 6.5 7 7.5 8 8.5 9 9.5
1 7.50% 6.25% 5.36% 4.69% 3.75% 3.13% 2.88% 2.68% 2.50% 2.34% 2.21% 2.08% 1.97%
2 55.50 46.88 40.56 35.74 28.88 24.22 22.41 20.85 19.50 18.31 17.26 16.32 15.48
3 26.91 25.00 23.18 22.34 20.21 18.16 17.24 16.39 15.60 14.88 14.21 13.60 13.03
4 10.09 21.87 22.47 19.86 16.40 14.06 13.26 12.87 12.48 12.09 11.70 11.33 10.98
5 8.43 17.37 16.41 14.06 13.10 12.18 11.41 10.74 10.16 9.65 9.24
6 14.35 14.06 13.10 12.18 11.41 10.75 10.16 9.65 9.17

7 12.31 13.10 12.19 11.41 10.74 10.16 9.64 9.17
8 4.91 10.66 11.41 10.75 10.16 9.65 9.17
9 4.28 9.40 10.17 9.64 9.17
10 3.81 8.44 9.18
11 3.44

Year
10 10.5 11 11.5 12 12.5 13 13.5 14 15 16 16.5 17
1 1.88% 1.79% 1.70% 1.63% 1.56% 1.50% 1.44% 1.39% 1.34% 1.25% 1.17% 1.14% 1.10%
2 14.72 14.03 13.40 12.83 12.31 11.82 11.37 10.96 10.57 9.88 9.27 8.99 8.73
3 12.51 12.03 11.58 11.16 10.77 10.40 10.06 9.74 9.44 8.89 8.40 8.17 7.96
4 10.63 10.31 10.00 9.70 9.42 9.15 8.90 8.66 8.43 8.00 7.61 7.43 7.25
5 9.04 8.83 8.63 8.44 8.24 8.06 7.87 7.69 7.52 7.20 6.90 6.75 6.61
6 8.72 8.32 7.95 7.63 7.33 7.09 6.96 6.84 6.72 6.48 6.25 6.14 6.03
7 8.72 8.31 7.96 7.63 7.33 7.05 6.78 6.53 6.31 5.90 5.66 5.58 5.50
8 8.72 8.32 7.95 7.62 7.33 7.05 6.78 6.53 6.31 5.90 5.54 5.38 5.22
9 8.72 8.31 7.96 7.63 7.33 7.05 6.78 6.53 6.31 5.90 5.54 5.38 5.23
10 8.71 8.32 7.95 7.62 7.32 7.05 6.78 6.54 6.31 5.91 5.54 5.38 5.22
11 7.63 8.31 7.96 7.63 7.33 7.05 6.78 6.53 6.31 5.90 5.54 5.38 5.23
12 3.12 6.96 7.62 7.32 7.04 6.78 6.54 6.30 5.91 5.55 5.38 5.22
13 2.86 6.41 7.05 6.78 6.53 6.31 5.90 5.54 5.38 5.23
14 2.64 5.94 6.54 6.30 5.91 5.55 5.38 5.22
15 2.45 5.52 5.90 5.54 5.37 5.23
16 5.17 5.55 5.38 5.22

17 4.85 5.37 5.23
18 2.02 4.57
Page 91

Year
18 19 20 22 24 25 26.5 28 30 35 40 45 50
1 1.04% 0.99% 0.938% 0.852% 0.781% 0.750% 0.708% 0.670% 0.625% 0.536% 0.469% 0.417% 0.375%
2 8.25 7.82 7.430 6.760 6.201 5.955 5.620 5.321 4.969 4.263 3.732 3.319 2.989
3 7.56 7.20 6.872 6.299 5.814 5.598 5.302 5.036 4.720 4.080 3.592 3.209 2.899
4 6.93 6.63 6.357 5.870 5.450 5.262 5.002 4.766 4.484 3.905 3.458 3.102 2.812
5 6.35 6.11 5.880 5.469 5.110 4.946 4.719 4.511 4.260 3.738 3.328 2.998 2.728
6 5.82 5.63 5.439 5.097 4.790 4.649 4.452 4.269 4.047 3.578 3.203 2.898 2.646
7 5.34 5.18 5.031 4.749 4.491 4.370 4.200 4.041 3.845 3.424 3.083 2.802 2.567
8 4.94 4.77 4.654 4.425 4.210 4.108 3.962 3.824 3.653 3.278 2.968 2.708 2.490
9 4.94 4.69 4.458 4.124 3.947 3.862 3.738 3.619 3.470 3.137 2.856 2.618 2.415
10 4.94 4.69 4.458 4.062 3.730 3.630 3.526 3.426 3.296 3.003 2.749 2.531 2.342
11 4.95 4.69 4.458 4.062 3.729 3.582 3.383 3.242 3.132 2.874 2.646 2.447 2.272
12 4.94 4.69 4.458 4.062 3.730 3.582 3.382 3.204 2.994 2.751 2.547 2.365 2.204
13 4.95 4.69 4.458 4.062 3.729 3.582 3.383 3.204 2.994 2.633 2.451 2.286 2.138
14 4.94 4.69 4.458 4.061 3.730 3.582 3.382 3.204 2.994 2.570 2.359 2.210 2.074
15 4.95 4.69 4.458 4.062 3.729 3.582 3.383 3.204 2.994 2.571 2.271 2.136 2.011
16 4.94 4.69 4.458 4.061 3.730 3.583 3.382 3.204 2.994 2.570 2.253 2.065 1.951
17 4.95 4.68 4.458 4.062 3.729 3.582 3.383 3.204 2.994 2.571 2.253 2.005 1.893
18 4.94 4.69 4.459 4.061 3.730 3.583 3.382 3.204 2.994 2.570 2.253 2.005 1.836
19 4.33 4.68 4.458 4.062 3.729 3.582 3.383 3.204 2.993 2.571 2.253 2.005 1.806
20 4.10 4.459 4.061 3.730 3.583 3.382 3.204 2.994 2.570 2.253 2.005 1.806
21 3.901 4.062 3.729 3.582 3.383 3.204 2.993 2.571 2.253 2.005 1.806
22 4.061 3.730 3.583 3.382 3.204 2.994 2.570 2.253 2.005 1.806
23 3.554 3.729 3.582 3.383 3.205 2.993 2.571 2.253 2.005 1.806
24 3.730 3.583 3.382 3.204 2.994 2.570 2.253 2.005 1.805
25 3.263 3.582 3.383 3.205 2.993 2.571 2.253 2.005 1.806
26 3.135 3.382 3.204 2.994 2.570 2.252 2.005 1.805

27 3.383 3.205 2.993 2.571 2.253 2.004 1.806
28 1.268 3.204 2.994 2.570 2.252 2.005 1.805
29 2.804 2.993 2.571 2.253 2.004 1.806
30 2.994 2.570 2.252 2.005 1.805
31 2.619 2.571 2.253 2.004 1.806

32 2.570 2.252 2.005 1.805
33 2.571 2.253 2.004 1.806
34 2.570 2.252 2.005 1.805
35 2.571 2.253 2.004 1.806
36 2.249 2.252 2.005 1.805

37 2.253 2.004 1.806
38 2.252 2.005 1.805
39 2.253 2.004 1.806
40 2.252 2.005 1.805
41 1.971 2.004 1.806

42 2.005 1.805
43 2.004 1.806
44 2.005 1.805
45 2.004 1.806
46 1.754 1.805
47 1.806
48 1.805
49 1.806
50 1.805
51 1.580
Page 92
RATES TO FIGURE INCLUSION AMOUNTS

FOR
LEASED LISTED PROPERTY
Table A-19. Amount A Percentages

First Tax Year During Lease in Which
Recovery Period Business Use is 50% or Less
of Property
Under ADS 1 2 3 4 5 6 7 8 9 10 11 12 & Later
Less than 7 years 2.1% –7.2% –19.8% –20.1% –12.4% –12.4% –12.4% –12.4% –12.4% –12.4% –12.4% –12.4%
7 to 10 years 3.9% –3.8% –17.7% –25.1% –27.8% –27.2% –27.1% –27.6% –23.7% –14.7% –14.7% –14.7%
More than 10 years 6.6% –1.6% –16.9% –25.6% –29.9% –31.1% –32.8% –35.1% –33.3% –26.7% –19.7% –12.2%
Table A-20. Amount B Percentages

First Tax Year During Lease in Which
Recovery Period Business Use is 50% or Less
of Property
Under ADS 1 2 3 4 5 6 7 8 9 10 11 12 & Later
Less than 7 years 0.0% 10.0% 22.0% 21.2% 12.7% 12.7% 12.7% 12.7% 12.7% 12.7% 12.7% 12.7%
7 to 10 years 0.0% 9.3% 23.8% 31.3% 33.8% 32.7% 31.6% 30.5% 25.0% 15.0% 15.0% 15.0%
More than 10 years 0.0% 10.1% 26.3% 35.4% 39.6% 40.2% 40.8% 41.4% 37.5% 29.2% 20.8% 12.5%
Page 93
Appendix B — Table of Class Lives and Recovery Periods

The Table of Class Lives and Recov- riod shown in the appropriate column elects to use ADS, the recovery period
ery Periods has two sections. The first following the description. is 13 years. If Richard only looked at
section, Specific Depreciable Assets Table B-1, he would select asset class
Property not in either table. If the 00.3, Land Improvements, and incor-
Used In All Business Activities, Except activity or the property is not included rectly use a recovery period of 15
As Noted, generally lists assets used in either table, check the end of Table years for GDS or 20 years for ADS.
in all business activities. It is shown as B-2 to find Certain Property for Which
Table B-1. The second section, Depre- Recovery Periods Assigned. This Example 2. Sam Plower produces
ciable Assets Used In The Following property generally has a recovery pe- rubber products. During the year, he
Activities, describes assets used only riod of 7 years for GDS or 12 years for made substantial improvements to the
in certain activities. It is shown as Ta- ADS. See Which Property Class Ap- land on which his rubber plant is lo-
ble B-2. plies Under GDS and Which Recovery cated. He checks Table B-1 and finds
Period Applies in chapter 4 for the land improvements under asset class
class lives or the recovery periods for 00.3. He then checks Table B-2 and
How To Use the Tables GDS and ADS for the following. finds his activity, producing rubber
You will need to look at both Table B-1 • Residential rental property and products, under asset class 30.1,
and B-2 to find the correct recovery nonresidential real property (also Manufacture of Rubber Products.
period. Generally, if the property is see Appendix A, Chart 2). Reading the headings and descrip-
tions under asset class 30.1, Sam
listed in Table B-1 you use the recov- • Qualified rent-to-own property. finds that it does not include land im-
ery period shown in that table. How-
ever, if the property is specifically • A motorsport entertainment com- provements. Therefore, Sam uses the
listed in Table B-2 under the type of plex. recovery period under asset class
00.3. The land improvements have a
activity in which it is used, you use the • Any retail motor fuels outlet. 20-year class life and a 15-year recov-
recovery period listed under the activ-
ity in that table. Use the tables in the • Any qualified leasehold improve- ery period for GDS. If he elects to use
order shown below to determine the ment property placed in service ADS, the recovery period is 20 years.
recovery period of your depreciable before January 1, 2006.
Example 3. Pam Martin owns a re-
property. • Any qualified restaurant property tail clothing store. During the year, she
Table B-1. Check Table B-1 for a placed in service before January purchased a desk and a cash register
description of the property. If it is de- 1, 2006. for use in her business. She checks
scribed in Table B-1, also check Table • Initial clearing and grading land Table B-1 and finds office furniture
B-2 to find the activity in which the improvements for gas utility under asset class 00.11. Cash regis-
property is being used. If the activity is property and electric utility trans- ters are not listed in any of the asset
described in Table B-2, read the text (if mission and distribution plants. classes in Table B-1. She then checks
any) under the title to determine if the Table B-2 and finds her activity, retail
property is specifically included in that • Any water utility property. store, under asset class 57.0, Distribu-
asset class. If it is, use the recovery • Certain electric transmission tive Trades and Services, which in-
period shown in the appropriate col- property used in the transmission cludes assets used in wholesale and
umn of Table B-2 following the at 69 or more kilovolts of electric- retail trade. This asset class does not
description of the activity. If the activity ity for sale and placed in service specifically list office furniture or a
is not described in Table B-2 or if the after April 11, 2005. cash register. She looks back at Table
activity is described but the property B-1 and uses asset class 00.11 for the
either is not specifically included in or • Natural gas gathering and distri- desk. The desk has a 10-year class life
is specifically excluded from that asset bution lines placed in service af- and a 7-year recovery period for GDS.
class, then use the recovery period ter April 11, 2005. If she elects to use ADS, the recovery
shown in the appropriate column fol- period is 10 years. For the cash regis-
lowing the description of the property Example 1. Richard Green is a pa- ter, she uses asset class 57.0 because
in Table B-1. per manufacturer. During the year, he cash registers are not listed in Table
made substantial improvements to the B-1 but it is an asset used in her retail
Tax-exempt use property subject to business. The cash register has a
a lease. The recovery period for ADS land on which his paper plant is lo-
cated. He checks Table B-1 and finds 9-year class life and a 5-year recovery
cannot be less than 125 percent of the period for GDS. If she elects to use the
lease term for any property leased land improvements under asset class
00.3. He then checks Table B-2 and ADS method, the recovery period is 9
under a leasing arrangement to a years.
tax-exempt organization, governmen- finds his activity, paper manufacturing,
tal unit, or foreign person or entity under asset class 26.1, Manufacture
(other than a partnership). of Pulp and Paper. He uses the recov-
ery period under this asset class be-
Table B-2. If the property is not listed cause it specifically includes land
in Table B-1, check Table B-2 to find improvements. The land improve-
the activity in which the property is ments have a 13-year class life and a ■
being used and use the recovery pe- 7-year recovery period for GDS. If he
Page 94
Table B-1. Table of Class Lives and Recovery Periods

Recovery Periods
(in years)
Asset Class Life GDS
class Description of assets included (in years) (MACRS) ADS
SPECIFIC DEPRECIABLE ASSETS USED IN ALL BUSINESS ACTIVITIES, EXCEPT AS NOTED:
00.11 Office Furniture, Fixtures, and Equipment:
Includes furniture and fixtures that are not a structural component of a building. Includes such 10 7 10
assets as desks, files, safes, and communications equipment. Does not include
communications equipment that is included in other classes.
00.12 Information Systems:
Includes computers and their peripheral equipment used in administering normal business 6 5 5
transactions and the maintenance of business records, their retrieval and analysis.
Information systems are defined as:
1) Computers: A computer is a programmable electronically activated device capable of
accepting information, applying prescribed processes to the information, and supplying the
results of these processes with or without human intervention. It usually consists of a central
processing unit containing extensive storage, logic, arithmetic, and control capabilities.
Excluded from this category are adding machines, electronic desk calculators, etc., and other
equipment described in class 00.13.
2) Peripheral equipment consists of the auxiliary machines which are designed to be placed
under control of the central processing unit. Nonlimiting examples are: Card readers, card
punches, magnetic tape feeds, high speed printers, optical character readers, tape cassettes,
mass storage units, paper tape equipment, keypunches, data entry devices, teleprinters,
terminals, tape drives, disc drives, disc files, disc packs, visual image projector tubes, card
sorters, plotters, and collators. Peripheral equipment may be used on-line or off-line.
Does not incude equipment that is an integral part of other capital equipment that is included
in other classes of economic activity, i.e., computers used primarily for process or production
control, switching, channeling, and automating distributive trades and services such as point
of sale (POS) computer systems. Also, does not include equipment of a kind used primarily for
amusement or entertainment of the user.
00.13 Data Handling Equipment; except Computers:
Includes only typewriters, calculators, adding and accounting machines, copiers, and 6 5 6
duplicating equipment.
00.21 Airplanes (airframes and engines), except those used in commercial or contract carrying 6 5 6
of passengers or freight, and all helicopters (airframes and engines)
00.22 Automobiles, Taxis 3 5 5
00.23 Buses 9 5 9
00.241 Light General Purpose Trucks:
Includes trucks for use over the road (actual weight less than 13,000 pounds) 4 5 5
00.242 Heavy General Purpose Trucks:
Includes heavy general purpose trucks, concrete ready mix-trucks, and ore trucks, for use 6 5 6
over the road (actual unloaded weight 13,000 pounds or more)
00.25 Railroad Cars and Locomotives, except those owned by railroad transportation 15 7 15
companies
00.26 Tractor Units for Use Over-The-Road 4 3 4
00.27 Trailers and Trailer-Mounted Containers 6 5 6
00.28 Vessels, Barges, Tugs, and Similar Water Transportation Equipment, except those used 18 10 18
in marine construction
00.3 Land Improvements:
Includes improvements directly to or added to land, whether such improvements are section 20 15 20
1245 property or section 1250 property, provided such improvements are depreciable.
Examples of such assets might include sidewalks, roads, canals, waterways, drainage
facilities, sewers (not including municipal sewers in Class 51), wharves and docks, bridges,
fences, landscaping shrubbery, or radio and television transmitting towers. Does not include
land improvements that are explicitly included in any other class, and buildings and structural
components as defined in section 1.48-1(e) of the regulations. Excludes public utility initial
clearing and grading land improvements as specified in Rev. Rul. 72-403, 1972-2 C.B. 102.
00.4 Industrial Steam and Electric Generation and/or Distribution Systems:
Includes assets, whether such assets are section 1245 property or 1250 property, providing 22 15 22
such assets are depreciable, used in the production and/or distribution of electricity with rated
total capacity in excess of 500 Kilowatts and/or assets used in the production and/or
distribution of steam with rated total capacity in excess of 12,500 pounds per hour for use by
the taxpayer in its industrial manufacturing process or plant activity and not ordinarily available
for sale to others. Does not include buildings and structural components as defined in section
1.48-1(e) of the regulations. Assets used to generate and/or distribute electricity or steam of
the type described above, but of lesser rated capacity, are not included, but are included in
the appropriate manufacturing equipment classes elsewhere specified. Also includes electric
generating and steam distribution assets, which may utilize steam produced by a waste
reduction and resource recovery plant, used by the taxpayer in its industrial manufacturing
process or plant activity. Steam and chemical recovery boiler systems used for the recovery
and regeneration of chemicals used in manufacturing, with rated capacity in excess of that
described above, with specifically related distribution and return systems are not included but
are included in appropriate manufacturing equipment classes elsewhere specified. An example
of an excluded steam and chemical recovery boiler system is that used in the pulp and paper
manufacturing equipment classes elsewhere specified. An example of an excluded steam and
chemical recovery boiler system is that used in the pulp and paper manufacturing industry.
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Recovery Periods
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DEPRECIABLE ASSETS USED IN THE FOLLOWING ACTIVITIES:
01.1 Agriculture:
Includes machinery and equipment, grain bins, and fences but no other land improvements, 10 7 10
that are used in the production of crops or plants, vines, and trees; livestock; the operation of
farm dairies, nurseries, greenhouses, sod farms, mushroom cellars, cranberry bogs, apiaries,
and fur farms; the performance of agriculture, animal husbandry, and horticultural services.
01.11 Cotton Ginning Assets 12 7 12
01.21 Cattle, Breeding or Dairy 7 5 7
01.221 Any breeding or work horse that is 12 years old or less at the time it is placed in service** 10 7 10
01.222 Any breeding or work horse that is more than 12 years old at the time it is placed in service** 10 3 10
01.223 Any race horse that is more than 2 years old at the time it is placed in service** * 3 12
01.224 Any horse that is more than 12 years old at the time it is placed in service and that is * 3 12
neither a race horse nor a horse described in class 01.222**
01.225 Any horse not described in classes 01.221, 01.222, 01.223, or 01.224 * 7 12
01.23 Hogs, Breeding 3 3 3
01.24 Sheep and Goats, Breeding 5 5 5
01.3 Farm buildings except structures included in Class 01.4 25 20 25
01.4 Single purpose agricultural or horticultural structures (within the meaning of section 15 10*** 15
168(i)(13) of the Code)
10.0 Mining:
Includes assets used in the mining and quarrying of metallic and nonmetallic minerals (including sand, 10 7 10
gravel, stone, and clay) and the milling, beneficiation and other primary preparation of such materials.
13.0 Offshore Drilling:
Includes assets used in offshore drilling for oil and gas such as floating, self-propelled and 7.5 5 7.5
other drilling vessels, barges, platforms, and drilling equipment and support vessels such as
tenders, barges, towboats and crewboats. Excludes oil and gas production assets.
13.1 Drilling of Oil and Gas Wells:
Includes assets used in the drilling of onshore oil and gas wells and the provision of 6 5 6
geophysical and other exploration services; and the provision of such oil and gas field services
as chemical treatment, plugging and abandoning of wells and cementing or perforating well
casings. Does not include assets used in the performance of any of these activities and
services by integrated petroleum and natural gas producers for their own account.
13.2 Exploration for and Production of Petroleum and Natural Gas Deposits:
Includes assets used by petroleum and natural gas producers for drilling of wells and production of 14 7 14
petroleum and natural gas, including gathering pipelines and related storage facilities. Also includes
petroleum and natural gas offshore transportation facilities used by producers and others consisting
of platforms (other than drilling platforms classified in Class 13.0), compression or pumping
equipment, and gathering and transmission lines to the first onshore transshipment facility. The assets
used in the first onshore transshipment facility are also included and consist of separation equipment
(used for separation of natural gas, liquids, and in Class 49.23), and liquid holding or storage facilities
(other than those classified in Class 49.25). Does not include support vessels.
13.3 Petroleum Refining:
Includes assets used for the distillation, fractionation, and catalytic cracking of crude petroleum 16 10 16
into gasoline and its other components.
15.0 Construction:
Includes assets used in construction by general building, special trade, heavy and marine 6 5 6
construction contractors, operative and investment builders, real estate subdividers and
developers, and others except railroads.
20.1 Manufacture of Grain and Grain Mill Products:
Includes assets used in the production of flours, cereals, livestock feeds, and other grain and 17 10 17
grain mill products.
20.2 Manufacture of Sugar and Sugar Products:
Includes assets used in the production of raw sugar, syrup, or finished sugar from sugar cane 18 10 18
or sugar beets.
20.3 Manufacture of Vegetable Oils and Vegetable Oil Products:
Includes assets used in the production of oil from vegetable materials and the manufacture of 18 10 18
related vegetable oil products.
20.4 Manufacture of Other Food and Kindred Products:
Includes assets used in the production of foods and beverages not included in classes 20.1, 12 7 12
20.2 and 20.3.
20.5 Manufacture of Food and Beverages—Special Handling Devices:
Includes assets defined as specialized materials handling devices such as returnable pallets, 4 3 4
palletized containers, and fish processing equipment including boxes, baskets, carts, and flaking trays
used in activities as defined in classes 20.1, 20.2, 20.3 and 20.4. Does not include general purpose
small tools such as wrenches and drills, both hand and power-driven, and other general purpose
equipment such as conveyors, transfer equipment, and materials handling devices.
* Property described in asset classes 01.223, 01.224, and 01.225 are assigned recovery periods but have no class lives.
** A horse is more than 2 (or 12) years old after the day that is 24 (or 144) months after its actual birthdate.
*** 7 if property was placed in service before 1989.
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Recovery Periods
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21.0 Manufacture of Tobacco and Tobacco Products:
Includes assets used in the production of cigarettes, cigars, smoking and chewing tobacco, 15 7 15
snuff, and other tobacco products.
22.1 Manufacture of Knitted Goods:
Includes assets used in the production of knitted and netted fabrics and lace. Assets used in 7.5 5 7.5
yarn preparation, bleaching, dyeing, printing, and other similar finishing processes, texturing,
and packaging, are elsewhere classified.
22.2 Manufacture of Yarn, Thread, and Woven Fabric:
Includes assets used in the production of spun yarns including the preparing, blending, spinning, and 11 7 11
twisting of fibers into yarns and threads, the preparation of yarns such as twisting, warping, and winding, the
production of covered elastic yarn and thread, cordage, woven fabric, tire fabric, braided fabric, twisted jute
for packaging, mattresses, pads, sheets, and industrial belts, and the processing of textile mill waste to
recover fibers, flocks, and shoddies. Assets used to manufacture carpets, man-made fibers, and nonwovens,
and assets used in texturing, bleaching, dyeing, printing, and other similar finishing processes, are elsewhere
classified.
22.3 Manufacture of Carpets and Dyeing, Finishing, and Packaging of Textile Products and
Manufacture of Medical and Dental Supplies:
Includes assets used in the production of carpets, rugs, mats, woven carpet backing, chenille, and other 9 5 9
tufted products, and assets used in the joining together of backing with carpet yarn or fabric. Includes assets
used in washing, scouring, bleaching, dyeing, printing, drying, and similar finishing processes applied to
textile fabrics, yarns, threads, and other textile goods. Includes assets used in the production and packaging
of textile products, other than apparel, by creasing, forming, trimming, cutting, and sewing, such as the
preparation of carpet and fabric samples, or similar joining together processes (other than the production of
scrim reinforced paper products and laminated paper products) such as the sewing and folding of hosiery
and panty hose, and the creasing, folding, trimming, and cutting of fabrics to produce nonwoven products,
such as disposable diapers and sanitary products. Also includes assets used in the production of medical
and dental supplies other than drugs and medicines. Assets used in the manufacture of nonwoven carpet
backing, and hard surface floor covering such as tile, rubber, and cork, are elsewhere classified.
22.4 Manufacture of Textile Yarns:
Includes assets used in the processing of yarns to impart bulk and/or stretch properties to the 8 5 8
yarn. The principal machines involved are falsetwist, draw, beam-to-beam, and stuffer box
texturing equipment and related highspeed twisters and winders. Assets, as described above,
which are used to further process man-made fibers are elsewhere classified when located in
the same plant in an integrated operation with man-made fiber producing assets. Assets used
to manufacture man-made fibers and assets used in bleaching, dyeing, printing, and other
similar finishing processes, are elsewhere classified.
22.5 Manufacture of Nonwoven Fabrics:
Includes assets used in the production of nonwoven fabrics, felt goods including felt hats, padding, batting, 10 7 10
wadding, oakum, and fillings, from new materials and from textile mill waste. Nonwoven fabrics are defined
as fabrics (other than reinforced and laminated composites consisting of nonwovens and other products)
manufactured by bonding natural and/or synthetic fibers and/or filaments by means of induced mechanical
interlocking, fluid entanglement, chemical adhesion, thermal or solvent reaction, or by combination thereof
other than natural hydration bonding as ocurs with natural cellulose fibers. Such means include resin
bonding, web bonding, and melt bonding. Specifically includes assets used to make flocked and needle
punched products other than carpets and rugs. Assets, as described above, which are used to manufacture
nonwovens are elsewhere classified when located in the same plant in an integrated operation with
man-made fiber producing assets. Assets used to manufacture man-made fibers and assets used in
bleaching, dyeing, printing, and other similar finishing processes, are elsewhere classified.
23.0 Manufacture of Apparel and Other Finished Products:
Includes assets used in the production of clothing and fabricated textile products by the cutting 9 5 9
and sewing of woven fabrics, other textile products, and furs; but does not include assets used
in the manufacture of apparel from rubber and leather.
24.1 Cutting of Timber:
Includes logging machinery and equipment and roadbuilding equipment used by logging and 6 5 6
sawmill operators and pulp manufacturers for their own account.
24.2 Sawing of Dimensional Stock from Logs:
Includes machinery and equipment installed in permanent or well established sawmills. 10 7 10
24.3 Sawing of Dimensional Stock from Logs:
Includes machinery and equipment in sawmills characterized by temporary foundations and a 6 5 6
lack, or minimum amount, of lumberhandling, drying, and residue disposal equipment and
facilities.
24.4 Manufacture of Wood Products, and Furniture:
Includes assets used in the production of plywood, hardboard, flooring, veneers, furniture, and 10 7 10
other wood products, including the treatment of poles and timber.
26.1 Manufacture of Pulp and Paper:
Includes assets for pulp materials handling and storage, pulp mill processing, bleach processing, paper and 13 7 13
paperboard manufacturing, and on-line finishing. Includes pollution control assets and all land improvements
associated with the factory site or production process such as effluent ponds and canals, provided such
improvements are depreciable but does not include buildings and structural components as defined in
section 1.48-1(e)(1) of the regulations. Includes steam and chemical recovery boiler systems, with any rated
capacity, used for the recovery and regeneration of chemicals used in manufacturing. Does not include
assets used either in pulpwood logging, or in the manufacture of hardboard.
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Recovery Periods
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26.2 Manufacture of Converted Paper, Paperboard, and Pulp Products:
Includes assets used for modification, or remanufacture of paper and pulp into converted 10 7 10
products, such as paper coated off the paper machine, paper bags, paper boxes, cartons and
envelopes. Does not include assets used for manufacture of nonwovens that are elsewhere
classified.
27.0 Printing, Publishing, and Allied Industries:
Includes assets used in printing by one or more processes, such as letter-press, lithography, 11 7 11
gravure, or screen; the performance of services for the printing trade, such as bookbinding,
typesetting, engraving, photo-engraving, and electrotyping; and the publication of newspapers,
books, and periodicals.
28.0 Manufacture of Chemicals and Allied Products:
Includes assets used to manufacture basic organic and inorganic chemicals; chemical products 9.5 5 9.5
to be used in further manufacture, such as synthetic fibers and plastics materials; and finished
chemical products. Includes assets used to further process man-made fibers, to manufacture
plastic film, and to manufacture nonwoven fabrics, when such assets are located in the same
plant in an integrated operation with chemical products producing assets. Also includes assets
used to manufacture photographic supplies, such as film, photographic paper, sensitized
photographic paper, and developing chemicals. Includes all land improvements associated with
plant site or production processes, such as effluent ponds and canals, provided such land
improvements are depreciable but does not include buildings and structural components as
defined in section 1.48-1(e) of the regulations. Does not include assets used in the manufacture
of finished rubber and plastic products or in the production of natural gas products, butane,
propane, and by-products of natural gas production plants.
30.1 Manufacture of Rubber Products:
Includes assets used for the production of products from natural, synthetic, or reclaimed 14 7 14
rubber, gutta percha, balata, or gutta siak, such as tires, tubes, rubber footwear, mechanical
rubber goods, heels and soles, flooring, and rubber sundries; and in the recapping, retreading,
and rebuilding of tires.
30.11 Manufacture of Rubber Products—Special Tools and Devices:
Includes assets defined as special tools, such as jigs, dies, mandrels, molds, lasts, patterns, 4 3 4
specialty containers, pallets, shells; and tire molds, and accessory parts such as rings and
insert plates used in activities as defined in class 30.1. Does not include tire building drums
and accessory parts and general purpose small tools such as wrenches and drills, both power
and hand-driven, and other general purpose equipment such as conveyors and transfer
equipment.
30.2 Manufacture of Finished Plastic Products:
Includes assets used in the manufacture of plastics products and the molding of primary
plastics for the trade. Does not include assets used in the manufacture of basic plastics 11 7 11
materials nor the manufacture of phonograph records.
30.21 Manufacture of Finished Plastic Products—Special Tools:
Includes assets defined as special tools, such as jigs, dies, fixtures, molds, patterns, gauges, 3.5 3 3.5
and specialty transfer and shipping devices, used in activities as defined in class 30.2. Special
tools are specifically designed for the production or processing of particular parts and have no
significant utilitarian value and cannot be adapted to further or different use after changes or
improvements are made in the model design of the particular part produced by the special
tools. Does not include general purpose small tools such as wrenches and drills, both hand and
power-driven, and other general purpose equipment such as conveyors, transfer equipment,
and materials handling devices.
31.0 Manufacture of Leather and Leather Products:
Includes assets used in the tanning, currying, and finishing of hides and skins; the processing 11 7 11
of fur pelts; and the manufacture of finished leather products, such as footwear, belting,
apparel, and luggage.
32.1 Manufacture of Glass Products:
Includes assets used in the production of flat, blown, or pressed products of glass, such as 14 7 14
float and window glass, glass containers, glassware and fiberglass. Does not include assets
used in the manufacture of lenses.
32.11 Manufacture of Glass Products—Special Tools:
Includes assets defined as special tools such as molds, patterns, pallets, and specialty transfer 2.5 3 2.5
and shipping devices such as steel racks to transport automotive glass, used in activities as
defined in class 32.1. Special tools are specifically designed for the production or processing of
particular parts and have no significant utilitarian value and cannot be adapted to further or
different use after changes or improvements are made in the model design of the particular
part produced by the special tools. Does not include general purpose small tools such as
wrenches and drills, both hand and power-driven, and other general purpose equipment such
as conveyors, transfer equipment, and materials handling devices.
32.2 Manufacture of Cement:
Includes assets used in the production of cement, but does not include assets used in the 20 15 20
manufacture of concrete and concrete products nor in any mining or extraction process.
32.3 Manufacture of Other Stone and Clay Products:
Includes assets used in the manufacture of products from materials in the form of clay and 15 7 15
stone, such as brick, tile, and pipe; pottery and related products, such as vitreous-china,
plumbing fixtures, earthenware and ceramic insulating materials; and also includes assets used
in manufacture of concrete and concrete products. Does not include assets used in any mining
or extraction processes.
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Recovery Periods
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33.2 Manufacture of Primary Nonferrous Metals:
Includes assets used in the smelting, refining, and electrolysis of nonferrous metals from ore, 14 7 14
pig, or scrap, the rolling, drawing, and alloying of nonferrous metals; the manufacture of
castings, forgings, and other basic products of nonferrous metals; and the manufacture of
nails, spikes, structural shapes, tubing, wire, and cable.
33.21 Manufacture of Primary Nonferrous Metals—Special Tools:
Includes assets defined as special tools such as dies, jigs, molds, patterns, fixtures, gauges, 6.5 5 6.5
and drawings concerning such special tools used in the activities as defined in class 33.2,
Manufacture of Primary Nonferrous Metals. Special tools are specifically designed for the
production or processing of particular products or parts and have no significant utilitarian value
and cannot be adapted to further or different use after changes or improvements are made in
the model design of the particular part produced by the special tools. Does not include general
purpose small tools such as wrenches and drills, both hand and power-driven, and other
general purpose equipment such as conveyors, transfer equipment, and materials handling
devices. Rolls, mandrels and refractories are not included in class 33.21 but are included in
class 33.2.
33.3 Manufacture of Foundry Products:
Includes assets used in the casting of iron and steel, including related operations such as 14 7 14
molding and coremaking. Also includes assets used in the finishing of castings and
patternmaking when performed at the foundry, all special tools and related land improvements.
33.4 Manufacture of Primary Steel Mill Products:
Includes assets used in the smelting, reduction, and refining of iron and steel from ore, pig, or 15 7 15
scrap; the rolling, drawing and alloying of steel; the manufacture of nails, spikes, structural
shapes, tubing, wire, and cable. Includes assets used by steel service centers, ferrous metal
forges, and assets used in coke production, regardless of ownership. Also includes related land
improvements and all special tools used in the above activities.
34.0 Manufacture of Fabricated Metal Products:
Includes assets used in the production of metal cans, tinware, fabricated structural metal 12 7 12
products, metal stampings, and other ferrous and nonferrous metal and wire products not
elsewhere classified. Does not include assets used to manufacture non-electric heating
apparatus.
34.01 Manufacture of Fabricated Metal Products—Special Tools:
Includes assets defined as special tools such as dies, jigs, molds, patterns, fixtures, gauges, 3 3 3
and returnable containers and drawings concerning such special tools used in the activities as
defined in class 34.0. Special tools are specifically designed for the production or processing of
particular machine components, products, or parts, and have no significant utilitarian value and
cannot be adapted to further or different use after changes or improvements are made in the
model design of the particular part produced by the special tools. Does not include general
small tools such as wrenches and drills, both hand and power-driven, and other general
purpose equipment such as conveyors, transfer equipment, and materials handling devices.
35.0 Manufacture of Electrical and Non-Electrical Machinery and Other Mechanical Products:
Includes assets used to manufacture or rebuild finished machinery and equipment and 10 7 10
replacement parts thereof such as machine tools, general industrial and special industry
machinery, electrical power generation, transmission, and distribution systems, space heating,
cooling, and refrigeration systems, commercial and home appliances, farm and garden
machinery, construction machinery, mining and oil field machinery, internal combustion engines
(except those elsewhere classified), turbines (except those that power airborne vehicles),
batteries, lamps and lighting fixtures, carbon and graphite products, and electromechanical and
mechanical products including business machines, instruments, watches and clocks, vending
and amusement machines, photographic equipment, medical and dental equipment and
appliances, and ophthalmic goods. Includes assets used by manufacturers or rebuilders of
such finished machinery and equipment in activities elsewhere classified such as the
manufacture of castings, forgings, rubber and plastic products, electronic subassemblies or
other manufacturing activities if the interim products are used by the same manufacturer
primarily in the manufacture, assembly, or rebuilding of such finished machinery and
equipment. Does not include assets used in mining, assets used in the manufacture of primary
ferrous and nonferrous metals, assets included in class 00.11 through 00.4 and assets
elsewhere classified.
36.0 Manufacture of Electronic Components, Products, and Systems:
Includes assets used in the manufacture of electronic communication, computation, 6 5 6
instrumentation and control system, including airborne applications; also includes assets used
in the manufacture of electronic products such as frequency and amplitude modulated
transmitters and receivers, electronic switching stations, television cameras, video recorders,
record players and tape recorders, computers and computer peripheral machines, and
electronic instruments, watches, and clocks; also includes assets used in the manufacture of
components, provided their primary use is products and systems defined above such as
electron tubes, capacitors, coils, resistors, printed circuit substrates, switches, harness cables,
lasers, fiber optic devices, and magnetic media devices. Specifically excludes assets used to
manufacture electronic products and components, photocopiers, typewriters, postage meters
and other electromechanical and mechanical business machines and instruments that are
elsewhere classified. Does not include semiconductor manufacturing equipment included in
class 36.1.
36.1 Any Semiconductor Manufacturing Equipment 5 5 5
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Recovery Periods
(in years)
37.11 Manufacture of Motor Vehicles:
Includes assets used in the manufacture and assembly of finished automobiles, trucks, trailers, 12 7 12
motor homes, and buses. Does not include assets used in mining, printing and publishing,
production of primary metals, electricity, or steam, or the manufacture of glass, industrial
chemicals, batteries, or rubber products, which are classified elsewhere. Includes assets used
in manufacturing activities elsewhere classified other than those excluded above, where such
activities are incidental to and an integral part of the manufacture and assembly of finished
motor vehicles such as the manufacture of parts and subassemblies of fabricated metal
products, electrical equipment, textiles, plastics, leather, and foundry and forging operations.
Does not include any assets not classified in manufacturing activity classes, e.g., does not
include any assets classified in asset guideline classes 00.11 through 00.4. Activities will be
considered incidental to the manufacture and assembly of finished motor vehicles only if 75
percent or more of the value of the products produced under one roof are used for the
manufacture and assembly of finished motor vehicles. Parts that are produced as a normal
replacement stock complement in connection with the manufacture and assembly of finished
motor vehicles are considered used for the manufacture assembly of finished motor vehicles.
Does not include assets used in the manufacture of component parts if these assets are used
by taxpayers not engaged in the assembly of finished motor vehicles.
37.12 Manufacture of Motor Vehicles—Special Tools:
Includes assets defined as special tools, such as jigs, dies, fixtures, molds, patterns, gauges, 3 3 3
and specialty transfer and shipping devices, owned by manufacturers of finished motor vehicles
and used in qualified activities as defined in class 37.11. Special tools are specifically designed
for the production or processing of particular motor vehicle components and have no
significant utilitarian value, and cannot be adapted to further or different use, after changes or
improvements are made in the model design of the particular part produced by the special
tools. Does not include general purpose small tools such as wrenches and drills, both hand and
powerdriven, and other general purpose equipment such as conveyors, transfer equipment, and
materials handling devices.
37.2 Manufacture of Aerospace Products:
Includes assets used in the manufacture and assembly of airborne vehicles and their component 10 7 10
parts including hydraulic, pneumatic, electrical, and mechanical systems. Does not include assets
used in the production of electronic airborne detection, guidance, control, radiation, computation,
test, navigation, and communication equipment or the components thereof.
37.31 Ship and Boat Building Machinery and Equipment:
Includes assets used in the manufacture and repair of ships, boats, caissons, marine drilling 12 7 12
rigs, and special fabrications not included in asset classes 37.32 and 37.33. Specifically
includes all manufacturing and repairing machinery and equipment, including machinery and
equipment used in the operation of assets included in asset class 37.32. Excludes buildings
and their structural components.
37.32 Ship and Boat Building Dry Docks and Land Improvements:
Includes assets used in the manufacture and repair of ships, boats, caissons, marine drilling 16 10 16
rigs, and special fabrications not included in asset classes 37.31 and 37.33. Specifically
includes floating and fixed dry docks, ship basins, graving docks, shipways, piers, and all other
land improvements such as water, sewer, and electric systems. Excludes buildings and their
structural components.
37.33 Ship and Boat Building—Special Tools:
Includes assets defined as special tools such as dies, jigs, molds, patterns, fixtures, gauges, 6.5 5 6.5
and drawings concerning such special tools used in the activities defined in classes 37.31 and
37.32. Special tools are specifically designed for the production or processing of particular
machine components, products, or parts, and have no significant utilitarian value and cannot
be adapted to further or different use after changes or improvements are made in the model
design of the particular part produced by the special tools. Does not include general purpose
small tools such as wrenches and drills, both hand and power-driven, and other general
purpose equipment such as conveyors, transfer equipment, and materials handling devices.
37.41 Manufacture of Locomotives:
Includes assets used in building or rebuilding railroad locomotives (including mining and 11.5 7 11.5
industrial locomotives). Does not include assets of railroad transportation companies or assets
of companies which manufacture components of locomotives but do not manufacture finished
locomotives.
37.42 Manufacture of Railroad Cars:
Includes assets used in building or rebuilding railroad freight or passenger cars (including rail 12 7 12
transit cars). Does not include assets of railroad transportation companies or assets of
companies which manufacture components of railroad cars but do not manufacture finished
railroad cars.
39.0 Manufacture of Athletic, Jewelry, and Other Goods:
Includes assets used in the production of jewelry; musical instruments; toys and sporting 12 7 12
goods; motion picture and television films and tapes; and pens, pencils, office and art supplies,
brooms, brushes, caskets, etc.
Railroad Transportation:
Classes with the prefix 40 include the assets identified below that are used in the commercial
and contract carrying of passengers and freight by rail. Assets of electrified railroads will be
classified in a manner corresponding to that set forth below for railroads not independently
operated as electric lines. Excludes the assets included in classes with the prefix beginning
00.1 and 00.2 above, and also excludes any non-depreciable assets included in Interstate
Commerce Commission accounts enumerated for this class.
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Recovery Periods
(in years)
40.1 Railroad Machinery and Equipment:
Includes assets classified in the following Interstate Commerce Commission accounts: 14 7 14
Roadway accounts:
(16) Station and office buildings (freight handling machinery and equipment only)
(25) TOFC/COFC terminals (freight handling machinery and equipment only)
(26) Communication systems
(27) Signals and interlockers
(37) Roadway machines
(44) Shop machinery
Equipment accounts:
(52) Locomotives
(53) Freight train cars
(54) Passenger train cars
(57) Work equipment
40.2 Railroad Structures and Similar Improvements:
Includes assets classified in the following Interstate Commerce Commission road accounts: 30 20 30
(6) Bridges, trestles, and culverts
(7) Elevated structures
(13) Fences, snowsheds, and signs
(16) Station and office buildings (stations and other operating structures only)
(17) Roadway buildings
(18) Water stations
(19) Fuel stations
(20) Shops and enginehouses
(25) TOFC/COFC terminals (operating structures only)
(31) Power transmission systems
(35) Miscellaneous structures
(39) Public improvements construction
40.3 Railroad Wharves and Docks:
Includes assets classified in the following Interstate Commerce accounts: 20 15 20
(23) Wharves and docks
(24) Coal and ore wharves
40.4 Railroad Track 10 7 10
40.51 Railroad Hydraulic Electric Generating Equipment 50 20 50
40.52 Railroad Nuclear Electric Generating Equipment 20 15 20
40.53 Railroad Steam Electric Generating Equipment 28 20 28
40.54 Railroad Steam, Compressed Air, and Other Power Plan Equipment 28 20 28
41.0 Motor Transport—Passengers:
Includes assets used in the urban and interurban commercial and contract carrying of 8 5 8
passengers by road, except the transportation assets included in classes with the prefix 00.2.
42.0 Motor Transport—Freight:
Includes assets used in the commercial and contract carrying of freight by road, except the 8 5 8
transportation assets included in classes with the prefix 00.2.
44.0 Water Transportation:
Includes assets used in the commercial and contract carrying of freight and passengers by 20 15 20
water except the transportation assets included in classes with the prefix 00.2. Includes all
related land improvements.
45.0 Air Transport:
Includes assets (except helicopters) used in commercial and contract carrying of passengers 12 7 12
and freight by air. For purposes of section 1.167(a)-11(d)(2)(iv)(a) of the regulations,
expenditures for “repair, maintenance, rehabilitation, or improvement,” shall consist of direct
maintenance expenses (irrespective of airworthiness provisions or charges) as defined by Civil
Aeronautics Board uniform accounts 5200, maintenance burden (exclusive of expenses
pertaining to maintenance buildings and improvements) as defined by Civil Aeronautics Board
accounts 5300, and expenditures which are not “excluded additions” as defined in section
1.167(a)-11(d)(2)(vi) of the regulations and which would be charged to property and equipment
accounts in the Civil Aeronautics Board uniform system of accounts.
45.1 Air Transport (restricted):
Includes each asset described in the description of class 45.0 which was held by the taxpayer 6 5 6
on April 15, 1976, or is acquired by the taxpayer pursuant to a contract which was, on April 15,
1976, and at all times thereafter, binding on the taxpayer. This criterion of classification based
on binding contract concept is to be applied in the same manner as under the general rules
expressed in section 49(b)(1), (4), (5) and (8) of the Code (as in effect prior to its repeal by the
Revenue Act of 1978, section 312(c)(1), (d), 1978-3 C.B. 1, 60).
46.0 Pipeline Transportation:
Includes assets used in the private, commercial, and contract carrying of petroleum, gas and 22 15 22
other products by means of pipes and conveyors. The trunk lines and related storage facilities
of integrated petroleum and natural gas producers are included in this class. Excludes initial
clearing and grading land improvements as specified in Rev. Rul. 72-403, 1972-2; C.B. 102, but
includes all other related land improvements.
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Recovery Periods
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Telephone Communications:
Includes the assets classified below and that are used in the provision of commercial and
contract telephonic services such as:
48.11 Telephone Central Office Buildings:
Includes assets intended to house central office equipment, as defined in Federal 45 20 45
Communications Commission Part 31 Account No. 212 whether section 1245 or section 1250
property.
48.12 Telephone Central Office Equipment:
Includes central office switching and related equipment as defined in Federal Communications 18 10 18
Commission Part 31 Account No. 221.
Does not include computer-based telephone central office switching equipment included in
class 48.121. Does not include private branch exchange (PBX) equipment.
48.121 Computer-based Telephone Central Office Switching Equipment:
Includes equipment whose functions are those of a computer or peripheral equipment (as 9.5 5 9.5
defined in section 168(i)(2)(B) of the Code) used in its capacity as telephone central office
equipment. Does not include private exchange (PBX) equipment.
48.13 Telephone Station Equipment:
Includes such station apparatus and connections as teletypewriters, telephones, booths, private 10 7* 10*
exchanges, and comparable equipment as defined in Federal Communications Commission
Part 31 Account Nos. 231, 232, and 234.
48.14 Telephone Distribution Plant:
Includes such assets as pole lines, cable, aerial wire, underground conduits, and comparable 24 15 24
equipment, and related land improvements as defined in Federal Communications Commission
Part 31 Account Nos. 241, 242.1, 242.2, 242.3, 242.4, 243, and 244.
48.2 Radio and Television Broadcastings:
Includes assets used in radio and television broadcasting, except transmitting towers. 6 5 6
Telegraph, Ocean Cable, and Satellite Communications (TOCSC) includes
communications-related assets used to provide domestic and international radio-telegraph,
wire-telegraph, ocean-cable, and satellite communications services; also includes related land
improvements. If property described in Classes 48.31–48.45 is comparable to telephone
distribution plant described in Class 48.14 and used for 2-way exchange of voice and data
communication which is the equivalent of telephone communication, such property is assigned
a class life of 24 years under this revenue procedure. Comparable equipment does not include
cable television equipment used primarily for 1-way communication.
48.31 TOCSC—Electric Power Generating and Distribution Systems:
Includes assets used in the provision of electric power by generation, modulation, rectification, 19 10 19
channelization, control, and distribution. Does not include these assets when they are installed
on customers premises.
48.32 TOCSC—High Frequency Radio and Microwave Systems:
Includes assets such as transmitters and receivers, antenna supporting structures, antennas, 13 7 13
transmission lines from equipment to antenna, transmitter cooling systems, and control and
amplification equipment. Does not include cable and long-line systems.
48.33 TOCSC—Cable and Long-line Systems:
Includes assets such as transmission lines, pole lines, ocean cables, buried cable and conduit, 26.5 20 26.5
repeaters, repeater stations, and other related assets. Does not include high frequency radio or
microwave systems.
48.34 TOCSC—Central Office Control Equipment:
Includes assets for general control, switching, and monitoring of communications signals 16.5 10 16.5
including electromechanical switching and channeling apparatus, multiplexing equipment
patching and monitoring facilities, in-house cabling, teleprinter equipment, and associated site
improvements.
48.35 TOCSC—Computerized Switching, Channeling, and Associated Control Equipment:
Includes central office switching computers, interfacing computers, other associated specialized 10.5 7 10.5
control equipment, and site improvements.
48.36 TOCSC—Satellite Ground Segment Property:
Includes assets such as fixed earth station equipment, antennas, satellite communications 10 7 10
equipment, and interface equipment used in satellite communications. Does not include general
purpose equipment or equipment used in satellite space segment property.
48.37 TOCSC—Satellite Space Segment Property:
Includes satellites and equipment used for telemetry, tracking, control, and monitoring when 8 5 8
used in satellite communications.
48.38 TOCSC—Equipment Installed on Customer’s Premises:
Includes assets installed on customer’s premises, such as computers, terminal equipment, 10 7 10
power generation and distribution systems, private switching center, teleprinters, facsimile
equipment and other associated and related equipment.
48.39 TOCSC—Support and Service Equipment:
Includes assets used to support but not engage in communications. Includes store, warehouse 13.5 7 13.5
and shop tools, and test and laboratory assets.
Cable Television (CATV): Includes communications-related assets used to provide cable
television community antenna television services. Does not include assets used to provide
subscribers with two-way communications services.
* Property described in asset guideline class 48.13 which is qualified technological equipment as defined in section 168(i)(2) is assigned a 5-year recovery
period.
Page 102

Recovery Periods
(in years)
48.41 CATV—Headend:
Includes assets such as towers, antennas, preamplifiers, converters, modulation equipment, and program 11 7 11
non-duplication systems. Does not include headend buildings and program origination assets.
48.42 CATV—Subscriber Connection and Distribution Systems:
Includes assets such as trunk and feeder cable, connecting hardware, amplifiers, power
equipment, passive devices, directional taps, pedestals, pressure taps, drop cables, matching 10 7 10
transformers, multiple set connector equipment, and convertors.
48.43 CATV—Program Origination:
Includes assets such as cameras, film chains, video tape recorders, lighting, and remote location 9 5 9
equipment excluding vehicles. Does not include buildings and their structural components.
48.44 CATV—Service and Test:
Includes assets such as oscilloscopes, field strength meters, spectrum analyzers, and cable 8.5 5 8.5
testing equipment, but does not include vehicles.
48.45 CATV—Microwaave Systems:
Inlcudes assets such as towers, antennas, transmitting and receiving equipment, and broad 9.5 5 9.5
band microwave assets is used in the provision of cable television services. Does not include
assets used in the provision of common carrier services.
Electric, Gas, Water and Steam, Utility Services:
Includes assets used in the production, transmission and distribution of electricity, gas, steam, 50 20 50
or water for sale including related land improvements.
49.11 Electric Utility Hydraulic Production Plant:
Includes assets used in the hydraulic power production of electricity for sale, including related
land improvements, such as dams, flumes, canals, and waterways.
49.12 Electric Utility Nuclear Production Plant:
Includes assets used in the nuclear power production and electricity for sale and related land 20 15 20
improvements. Does not include nuclear fuel assemblies.
49.121 Electric Utility Nuclear Fuel Assemblies:
Includes initial core and replacement core nuclear fuel assemblies (i.e., the composite of fabricated nuclear 5 5 5
fuel and container) when used in a boiling water, pressurized water, or high temperature gas reactor used in
the production of electricity. Does not include nuclear fuel assemblies used in breader reactors.
49.13 Electric Utility Steam Production Plant:
Includes assets used in the steam power production of electricity for sale, combusion turbines operated in a 28 20 28
combined cycle with a conventional steam unit and related land improvements. Also includes package
boilers, electric generators and related assets such as electricity and steam distribution systems as used by
a waste reduction and resource recovery plant if the steam or electricity is normally for sale to others.
49.14 Electric Utility Transmission and Distribution Plant:
Includes assets used in the transmission and distribution of electricity for sale and related land 30 20 30
improvements. Excludes initial clearing and grading land improvements as specified in Rev. Rul.
72-403, 1972-2 C.B. 102.
49.15 Electric Utility Combustion Turbine Production Plant:
Includes assets used in the production of electricity for sale by the use of such prime movers as jet 20 15 20
engines, combustion turbines, diesel engines, gasoline engines, and other internal combustion
engines, their associated power turbines and/or generators, and related land improvements. Does not
include combustion turbines operated in a combined cycle with a conventional steam unit.
49.21 Gas Utility Distribution Facilities:
Includes gas water heaters and gas conversion equipment installed by utility on customers’ 35 20 35
premises on a rental basis.
49.221 Gas Utility Manufactured Gas Production Plants:
Includes assets used in the manufacture of gas having chemical and/or physical properties 30 20 30
which do not permit complete interchangeability with domestic natural gas. Does not include
gas-producing systems and related systems used in waste reduction and resource recovery
plants which are elsewhere classified.
49.222 Gas Utility Substitute Natural Gas (SNG) Production Plant (naphtha or lighter hydrocarbon
feedstocks):
Includes assets used in the catalytic conversion of feedstocks or naphtha or lighter 14 7 14
hydrocarbons to a gaseous fuel which is completely interchangeable with domestic natural gas.
49.223 Substitute Natural Gas—Coal Gasification:
Includes assets used in the manufacture and production of pipeline quality gas from coal using the basic Lurgi 18 10 18
process with advanced methanation. Includes all process plant equipment and structures used in this coal
gasification process and all utility assets such as cooling systems, water supply and treatment facilities, and
assets used in the production and distribution of electricity and steam for use by the taxpayer in a gasification
plant and attendant coal mining site processes but not for assets used in the production and distribution of
electricity and steam for sale to others. Also includes all other related land improvements. Does not include
assets used in the direct mining and treatment of coal prior to the gasification process itself.
49.23 Natural Gas Production Plant 14 7 14
49.24 Gas Utility Trunk Pipelines and Related Storage Facilities:
Excluding initial clearing and grading land improvements as specified in Rev. Rul. 72-40. 22 15 22
49.25 Liquefied Natural Gas Plant:
Includes assets used in the liquefaction, storage, and regasification of natural gas including 22 15 22
loading and unloading connections, instrumentation equipment and controls, pumps, vaporizers
and odorizers, tanks, and related land improvements. Also includes pipeline interconnections
with gas transmission lines and distribution systems and marine terminal facilities.
Page 103

Recovery Periods
(in years)
49.3 Water Utilities:
Includes assets used in the gathering, treatment, and commercial distribution of water. 50 20*** 50
49.4 Central Steam Utility Production and Distribution:
Includes assets used in the production and distribution of steam for sale. Does not include 28 20 28
assets used in waste reduction and resource recovery plants which are elsewhere classified.
49.5 Waste Reduction and Resource Recovery Plants:
Includes assets used in the conversion of refuse or other solid waste or biomass to heat or to a 10 7 10
solid, liquid, or gaseous fuel. Also includes all process plant equipment and structures at the
site used to receive, handle, collect, and process refuse or other solid waste or biomass in a
waterwall, combustion system, oil or gas pyrolysis system, or refuse derived fuel system to
create hot water, gas, steam and electricity. Includes material recovery and support assets
used in refuse or solid refuse or solid waste receiving, collecting, handling, sorting, shredding,
classifying, and separation systems. Does not include any package boilers, or electric
generators and related assets such as electricity, hot water, steam and manufactured gas
production plants classified in classes 00.4, 49.13, 49.221, and 49.4. Does include, however, all
other utilities such as water supply and treatment facilities, ash handling and other related land
improvements of a waste reduction and resource recovery plant.
50. Municipal Wastewater Treatment Plant 24 15 24
51. Municipal Sewer 50 20*** 50
57.0 Distributive Trades and Services:
Includes assets used in wholesale and retail trade, and personal and professional services. 9 5 9*
Includes section 1245 assets used in marketing petroleum and petroleum products.
57.1 Distributive Trades and Services—Billboard, Service Station Buildings and Petroleum
Marketing Land Improvements:
Includes section 1250 assets, including service station buildings and depreciable land 20 15 20
improvements, whether section 1245 property or section 1250 property, used in the marketing
of petroleum and petroleum products, but not including any of these facilities related to
petroleum and natural gas trunk pipelines. Includes car wash buildings and related land
improvements. Includes billboards, whether such assets are section 1245 property or section
1250 property. Excludes all other land improvements, buildings and structural components as
defined in section 1.48-1(e) of the regulations. See Gas station convenience stores in chapter 3.
79.0 Recreation:
Includes assets used in the provision of entertainment services on payment of a fee or 10 7 10
admission charge, as in the operation of bowling alleys, billiard and pool establishments,
theaters, concert halls, and miniature golf courses. Does not include amusement and theme
parks and assets which consist primarily of specialized land improvements or structures, such
as golf courses, sports stadia, race tracks, ski slopes, and buildings which house the assets
used in entertainment services.
80.0 Theme and Amusement Parks:
Includes assets used in the provision of rides, attractions, and amusements in activities defined as theme 12.5 7 12.5
and amusement parks, and includes appurtenances associated with a ride, attraction, amusement or theme
setting within the park such as ticket booths, facades, shop interiors, and props, special purpose structures,
and buildings other than warehouses, administration buildings, hotels, and motels. Includes all land
improvements for or in support of park activities (e.g., parking lots, sidewalks, waterways, bridges, fences,
landscaping, etc.), and support functions (e.g., food and beverage retailing, souvenir vending and other
nonlodging accommodations) if owned by the park and provided exclusively for the benefit of park patrons.
Theme and amusement parks are defined as combinations of amusements, rides, and attractions which are
permanently situated on park land and open to the public for the price of admission. This guideline class is a
composite of all assets used in this industry except transportation equipment (general purpose trucks, cars,
airplanes, etc., which are included in asset guideline classes with the prefix 00.2), assets used in the
provision of administrative services (asset classes with the prefix 00.1) and warehouses, administration
buildings, hotels and motels.
Certain Property for Which Recovery Periods Assigned
A. Personal Property With No Class Life 7 12
Section 1245 Real Property With No Class Life 7 40
B. Qualified Technological Equipment, as defined in section 168(i)(2). ** 5 5
C. Property Used in Connection with Research and Experimentation referred to in section ** 5 class life if
168(e)(3)(B). no class
life—12
D. Alternative Energy Property described in sections 48(1)(3)(viii) or (iv), or section 48(1)(4) of the ** 5 class life if
Code. no class
life—12
E. Biomass property described in section 48(1)(15) and is a qualifying small production facility ** 5 class life if
within the meaning of section 3(17)(c) of the Federal Power Act (16 U.S.C. 796(17)(C)), as in no class
effect on September 1, 1986. life—12
* Any high technology medical equipment as defined in section 168(i)(2)(C) which is described in asset guideline class 57.0 is assigned a 5-year
recovery period for the alternate MACRS method.
** The class life (if any) of property described in classes B, C, D, or E is determined by reference to the asset guideline classes. If an item of property
described in paragraphs B, C, D, or E is not described in any asset guideline class, such item of property has no class life.
*** Use straight line over 25 years if placed in service after June 12, 1996, unless placed in service under a binding contract in effect before June 10,
1996, and at all times until placed in service.
Page 104
Glossary
The definitions in this glossary are ery period for most types of property System (GDS) of MACRS uses the
the meanings of the terms as used in under the General Depreciation Sys- 150% and 200% declining balance
this publication. The same term used tem (GDS) and Alternative Deprecia- methods for certain types of property.
in another publication may have a tion System (ADS). A depreciation rate (percentage) is de-
slightly different meaning. termined by dividing the declining bal-
Clean-fuel vehicle property: Either ance percentage by the recovery
Abstract fees: Expenses generally of the following kinds of property. period for the property.
paid by a buyer to research the title of
real property. 1. Motor vehicles produced by an Disposition: The permanent with-
original equipment manufacturer drawal from use in a trade or business
Active conduct of a trade or busi- and designed to be propelled by or from the production of income.
ness: Generally, for the section 179 a clean-burning fuel.
deduction, a taxpayer is considered to Documentary evidence: Written rec-
conduct a trade or business actively if 2. Any property installed on a motor ords that establish certain facts.
he or she meaningfully participates in vehicle to enable it to be pro-
the management or operations of the pelled by a clean-burning fuel if: Exchange: To barter, swap, part
trade or business. A mere passive in- with, give, or transfer property for other
a. The property is an engine (or property or services.
vestor in a trade or business does not
modification of an engine) that
actively conduct the trade or business. Fair market value (FMV): The price
can use a clean-burning fuel,
Adjusted basis: The original cost of or that property brings when it is offered
property, plus certain additions and for sale by one who is willing but not
b. The property is used to store
improvements, minus certain deduc- obligated to sell, and is bought by one
or deliver that fuel to the en-
tions such as depreciation allowed or who is willing or desires to buy but is
gine or to exhaust gases from
allowable and casualty losses. not compelled to do so.
the combustion of that fuel.
Amortization: A ratable deduction for Fiduciary: The one who acts on be-
the cost of intangible property over its half of another as a guardian, trustee,
Clean-fuel vehicle refueling prop-
useful life. executor, administrator, receiver, or
erty: Any property (other than a build-
conservator.
Amount realized: The total of all ing or its structural components) used
money received plus the fair market to: Fungible commodity: A commodity
of a nature that one part may be used
value of all property or services re- • Store or dispense a clean-burn-
ceived from a sale or exchange. The in place of another part.
ing fuel into the fuel tank of a
amount realized also includes any lia- motor vehicle propelled by the Goodwill: An intangible property
bilities assumed by the buyer and any fuel, but only if the storage or such as the advantage or benefit re-
liabilities to which the property trans- dispensing is at the point where ceived in property beyond its mere
ferred is subject, such as real estate the fuel is delivered into the tank, value. It is not confined to a name but
taxes or a mortgage. or can also be attached to a particular
Basis: A measure of an individual’s • Recharge motor vehicles pro- area where business is transacted, to
investment in property for tax pur- pelled by electricity, but only if a list of customers, or to other ele-
poses. the property is located at the ments of value in business as a going
point where the vehicles are concern.
Business/investment use: Usually,
recharged. Grantor: The one who transfers prop-
a percentage showing how much an
item of property, such as an automo- erty to another.
bile, is used for business and invest- Commuting: Travel between a per-
ment purposes. sonal home and work or job site within Improvement: An addition to or par-
the area of an individual’s tax home. tial replacement of property that adds
Capitalized: Expended or treated as to its value, appreciably lengthens the
an item of a capital nature. A capital- Convention: A method established time you can use it, or adapts it to a
ized amount is not deductible as a under the Modified Accelerated Cost different use.
current expense and must be included Recovery System (MACRS) to deter-
in the basis of property. mine the portion of the year to depreci- Intangible property: Property that
ate property both in the year the has value but cannot be seen or
Circumstantial evidence: Details or property is placed in service and in the touched, such as goodwill, patents,
facts which indirectly point to other year of disposition. copyrights, and computer software.
facts.
Declining balance method: An ac- Listed property: Passenger automo-
Class life: A number of years that es- celerated method to depreciate prop- biles; any other property used for
tablishes the property class and recov- erty. The General Depreciation transportation; property of a type gen-
Page 105
erally used for entertainment, recrea- for depreciation or amortization. Sec- Tax-exempt: Not subject to tax.
tion or amusement; computers and tion 1245 property includes personal
their peripheral equipment (unless property, single purpose agricultural Term interest: A life interest in prop-
used only at a regular business estab- and horticultural structures, storage erty, an interest in property for a term
lishment and owned or leased by the facilities used in connection with the of years, or an income interest in a
person operating the establishment); distribution of petroleum or primary trust. It generally refers to a present or
products of petroleum, and railroad future interest in income from property
and cellular telephones or similar tele-
grading or tunnel bores. or the right to use property that termi-
communications equipment.
nates or fails upon the lapse of time,
Nonresidential real property: Most Section 1250 property: Real prop- the occurrence of an event, or the fail-
real property other than residential erty (other than section 1245 property) ure of an event to occur.
rental property. which is or has been subject to an
allowance for depreciation. Unadjusted basis: The basis of an
Placed in service: Ready and avail- item of property for purposes of figur-
able for a specific use whether in a Standard mileage rate: The estab- ing gain on a sale without taking into
trade or business, the production of lished amount for optional use in de- account any depreciation taken in ear-
income, a tax-exempt activity, or a per- termining a tax deduction for lier years but with adjustments for
sonal activity. automobiles instead of deducting de- other amounts, including amortization,
preciation and actual operating ex- the section 179 deduction, any special
Property class: A category for prop- penses. depreciation allowance, any deduction
erty under MACRS. It generally deter- claimed for clean-fuel vehicles or
mines the depreciation method, Straight line method: A way to figure clean-fuel vehicle refueling property
recovery period, and convention. depreciation for property that ratably placed in service before January 1,
deducts the same amount for each 2006, and any electric vehicle credit.
Recapture: To include as income on year in the recovery period. The rate
your return an amount allowed or al- (in percentage terms) is determined by Unit-of-production method: A way
lowable as a deduction in a prior year. dividing 1 by the number of years in to figure depreciation for certain prop-
the recovery period. erty. It is determined by estimating the
Recovery period: The number of number of units that can be produced
years over which the basis of an item Structural components: Parts that before the property is worn out. For
of property is recovered. together form an entire structure, such example, if it is estimated that a ma-
as a building. The term includes those chine will produce 1000 units before its
Remainder interest: That part of an parts of a building such as walls, parti-
estate that is left after all the other useful life ends, and it actually pro-
tions, floors, and ceilings, as well as duces 100 units in a year, the percent-
provisions of a will have been satis- any permanent coverings such as
fied. age to figure depreciation for that year
paneling or tiling, windows and doors, is 10% of the machine’s cost less its
Residential rental property: Real and all components of a central air salvage value.
property, generally buildings or struc- conditioning or heating system includ-
tures, if 80% or more of its annual ing motors, compressors, pipes and Useful life: An estimate of how long
gross rental income is from dwelling ducts. It also includes plumbing fix- an item of property can be expected to
units. tures such as sinks, bathtubs, electri- be usable in trade or business or to
cal wiring and lighting fixtures, and produce income.
Salvage value: An estimated value of other parts that form the structure.
property at the end of its useful life. Not
used under MACRS. Tangible property: Property you can
see or touch, such as buildings, ma-
Section 1245 property: Property that chinery, vehicles, furniture, and equip-
■
is or has been subject to an allowance ment.
Page 106
To help us develop a more useful index, please let us know if you have ideas for index entries.
Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.
A Cooperative apartment . . . . . . . . . . . 4 How to claim depreciation . . . . . . 13

Addition to property . . . . . . . . . . . . . 36 Copyright (See also Section 197 Employee deduction, listed
Adjusted basis . . . . . . . . . . . . . . . . . . . 12 intangibles) . . . . . . . . . . . . . . . . . . . . . 10 property . . . . . . . . . . . . . . . . . . . . . . . . 55
Agreement not to compete (See Correcting depreciation Energy property . . . . . . . . . . . . . . . . . 17
Section 197 intangibles) deductions . . . . . . . . . . . . . . . . . . . . . 13 Exchange of MACRS
Alternative Depreciation System Cost basis . . . . . . . . . . . . . . . . . . . . . . . . 11 property . . . . . . . . . . . . . . . . . . . . . . . . 45
(ADS): Customer list (See Section 197
Recovery periods . . . . . . . . . . . . . . . 35 intangibles) F
Required use . . . . . . . . . . . . . . . . . . . 30 Farm:
Amended return . . . . . . . . . . . . . . . . . 13 D Property . . . . . . . . . . . . . . . . . . . . . . . . 38
Apartment: Declining balance: Figuring MACRS:
Cooperative . . . . . . . . . . . . . . . . . . . . . 4 Method . . . . . . . . . . . . . . . . . . . . . . . . . 42 Using percentage tables . . . . . . . . 38
Rental . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Without using percentage
Assistance (See Tax help) Deduction limit: tables . . . . . . . . . . . . . . . . . . . . . . . . 42
Automobile (See Passenger Automobile . . . . . . . . . . . . . . . . . . . . . 60 Films . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
automobile) Exception for clean-fuel Franchise (See Section 197
modifications . . . . . . . . . . . . . . . . . 60 intangibles)
Section 179 . . . . . . . . . . . . . . . . . . . . . 17 Free tax services . . . . . . . . . . . . . . . . 66
B Depreciation:
Basis: Deduction:
Adjustments . . . . . . . . . . . . 12, 21, 39 Employee . . . . . . . . . . . . . . . . . . . . 55 G
Basis for depreciation . . . . . . . . . . . 34 Listed property . . . . . . . . . . . . . . . 55 General asset account:
Casualty loss . . . . . . . . . . . . . . . . . . . 39 Determinable useful life . . . . . . . . . . 5 Abusive transaction . . . . . . . . . . . . . 51
Change in use . . . . . . . . . . . . . . . . . . 11 Excepted property . . . . . . . . . . . . . . . 6 Disposing of property . . . . . . . . . . . 49
Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Incorrect amount deducted . . . . . 13 Grouping property in . . . . . . . . . . . . 49
Depreciable basis . . . . . . . . . . . . . . 28 Methods . . . . . . . . . . . . . . . . . . . . . . . . 37 Nonrecognition transaction . . . . . 50
Other than cost . . . . . . . . . . . . . . . . . 11 Property lasting more than one General Depreciation System
Recapture of clean-fuel vehicle year . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (GDS), recovery periods . . . . . . 34
deduction or credit . . . . . . . . . . . 39 Property owned . . . . . . . . . . . . . . . . . . 4 Gift (See Basis, other than cost)
Term interest . . . . . . . . . . . . . . . . . . . . 6 Property used in business . . . . . . . 5 Glossary . . . . . . . . . . . . . . . . . . . . . . . . 105
Unadjusted . . . . . . . . . . . . . . . . . . . . . 39 Recapture . . . . . . . . . . . . . . . . . . 52, 58
Business use of property, Depreciation allowable . . . . . . . . . . 12
partial . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Depreciation allowed . . . . . . . . . . . . 12
H
Business-use limit, recapture of Help (See Tax help)
Depreciation deduction:
Section 179 deduction . . . . . . . . 22 Listed property . . . . . . . . . . . . . . . . . . 56
Business-use requirement, listed Determinable useful life . . . . . . . . . . 5 I
property . . . . . . . . . . . . . . . . . . . . . . . . 56 Disposition: Idle property . . . . . . . . . . . . . . . . . . . . . . 7
Before recovery period ends . . . . 41 Improvements . . . . . . . . . . . . . . . 12, 36
General asset account Income forecast method . . . . . . . . 10
C property . . . . . . . . . . . . . . . . . . . . . . 49
Car (See Passenger automobile) Incorrect depreciation
Section 179 deduction . . . . . . . . . . 22 deductions . . . . . . . . . . . . . . . . . . . . . 13
Carryover of section 179
deduction . . . . . . . . . . . . . . . . . . . . . . 20 Indian reservation:
Casualty loss, effect of . . . . . . . . . . 39
E Defined . . . . . . . . . . . . . . . . . . . . . . . . . 35
Election: Qualified infrastructure
Cellular telephone (See Listed
ADS . . . . . . . . . . . . . . . . . . . . . . . . 31, 38 property . . . . . . . . . . . . . . . . . . . . . . 35
property)
Declining balance (150% DB) Qualified property . . . . . . . . . . . . . . . 35
Changing accounting Recovery periods for qualified
method . . . . . . . . . . . . . . . . . . . . . . . 38
method . . . . . . . . . . . . . . . . . . . . . . . . . 13 property . . . . . . . . . . . . . . . . . . . . . . 35
Exclusion from MACRS . . . . . . . . . 11
Comments on publication . . . . . . . . 3 General asset account . . . . . . . . . . 52 Related person . . . . . . . . . . . . . . . . . 35
Communication equipment (See Not to claim special depreciation Inheritance (See Basis, other than
Listed property) allowance . . . . . . . . . . . . . . . . . . . . 29 cost)
Commuting . . . . . . . . . . . . . . . . . . . . . . 57 Section 179 deduction . . . . . . . . . . 22 Intangible property:
Computer (See Listed property) Straight line method . . . . . . . . . . . . 38 Depreciation method . . . . . . . . 9, 10
Computer software . . . . . . . . 6, 10, 15 Electric vehicle . . . . . . . . . . . . . . . . . . 61 Income forecast method . . . . . . . . 10
Containers . . . . . . . . . . . . . . . . . . . . . . . . 5 Employee: Straight line method . . . . . . . . . . . . . 9
Conventions . . . . . . . . . . . . . . . . . . . . . 36 Depreciation deduction . . . . . . . . . 55 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Page 107
Investment use of property, Figuring, short tax year . . . . . . . . . 47 Term interest . . . . . . . . . . . . . . . . . . . . 6

partial . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 General Depreciation System Publications (See Tax help)
Involuntary conversion of MACRS (GDS) . . . . . . . . . . . . . . . . . . . . . . . . 30
property . . . . . . . . . . . . . . . . . . . . . . . . 45 Percentage tables . . . . . . . . . . . . . . 39
Property classes . . . . . . . . . . . . . . . . 31 Q
Recovery periods . . . . . . . . . . . . . . . 34 Qualified Gulf Opportunity Zone
L Short tax year . . . . . . . . . . . . . . . . . . 46 property:
Land: Straight line method . . . . . . . . . . . . 42 Acquisition date test . . . . . . . . . . . . 27
Not depreciable . . . . . . . . . . . . . . . . . . 6 More information (See Tax help) Excepted property . . . . . . . . . . . . . . 28
Preparation costs . . . . . . . . . . . . . . . . 6 Original use test . . . . . . . . . . . . . . . . 28
Leased property . . . . . . . . . . . . . . . . . 16 Placed in service date test . . . . . . 27
Leasehold improvement property,
N Substantial use test . . . . . . . . . . . . . 28
defined . . . . . . . . . . . . . . . . . . . . . 24, 33 Noncommercial aircraft:
Qualified Gulf Opportunity Zone
Acquisition date test . . . . . . . . . . . . 24
Liberty Zone leasehold property, requirements for the
Excepted property . . . . . . . . . . . . . . 25
improvement property, special allowance . . . . . . . . . . . . . 27
Original use test . . . . . . . . . . . . . . . . 25
defined . . . . . . . . . . . . . . . . . . . . . . . . . 25 Qualified leasehold improvement
Placed in service date test . . . . . . 25
Life tenant (See also Term property, defined . . . . . . . . . . 24, 33
Noncommercial aircraft,
interests) . . . . . . . . . . . . . . . . . . . . . . . . 4 Qualified Liberty Zone property:
requirements for the special
Limit on deduction: Acquisition date test . . . . . . . . . . . . 26
allowance . . . . . . . . . . . . . . . . . . . . . . 24
Automobile . . . . . . . . . . . . . . . . . . . . . 60 Excepted property . . . . . . . . . . . . . . 27
Nonresidential real property . . . . 32
Section 179 . . . . . . . . . . . . . . . . . . . . . 17 Original use test . . . . . . . . . . . . . . . . 26
Nontaxable transfer of MACRS
Listed property: Placed in service date test . . . . . . 26
property . . . . . . . . . . . . . . . . . . . . . . . . 46
5% owner . . . . . . . . . . . . . . . . . . . . . . . 57 Substantial use test . . . . . . . . . . . . . 26
Computer . . . . . . . . . . . . . . . . . . . . . . . 55 Qualified Liberty Zone property,
Condition of employment . . . . . . . 55 O requirements for the special
Defined . . . . . . . . . . . . . . . . . . . . . . . . . 53 Office in the home . . . . . . . . . . . . 5, 35 allowance . . . . . . . . . . . . . . . . . . . . . . 26
Employee deduction . . . . . . . . . . . . 55 Ownership, incidents of . . . . . . . . . . 4 Qualified property, special
Employer convenience . . . . . . . . . 55 depreciation allowance . . . . . . . 23
Improvements to . . . . . . . . . . . . . . . . 54 P
Leased . . . . . . . . . . . . . . . . . . . . . . . . . 58 Partial business use . . . . . . . . . . . . . 16
Passenger automobile . . . . . . . . . . 54 R
Passenger automobile:
Qualified business use . . . . . . . . . . 57 Real property . . . . . . . . . . . . . . . . . . . . . 8
Defined . . . . . . . . . . . . . . . . . . . . . . . . . 54
Recordkeeping . . . . . . . . . . . . . . . . . 63 Recapture:
Electric vehicles . . . . . . . . . . . . . . . . 61
Related person . . . . . . . . . . . . . . . . . 57 Clean-fuel vehicle deduction or
Limit on . . . . . . . . . . . . . . . . . . . . . . . . . 60
Reporting on Form 4562 . . . . . . . . 65 credit . . . . . . . . . . . . . . . . . . . . . . . . . 39
Maximum depreciation
Lodging . . . . . . . . . . . . . . . . . . . . . . . . . . 17 General asset account, abusive
deduction . . . . . . . . . . . . . . . . . . . . . 60
Long production period property: transaction . . . . . . . . . . . . . . . . . . . 51
Trucks . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Acquisition date test . . . . . . . . . . . . 24 Vans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Listed property . . . . . . . . . . . . . . . . . . 58
Excepted property . . . . . . . . . . . . . . 25 MACRS depreciation . . . . . . . . . . . 52
Patent (See also Section 197
Original use test . . . . . . . . . . . . . . . . 25 Section 179 deduction . . . . . . . . . . 22
intangibles) . . . . . . . . . . . . . . . . . . . . . 10
Placed in service date test . . . . . . 25 Special depreciation
Personal property . . . . . . . . . . . . . . . . 8 allowance . . . . . . . . . . . . . . . . . . . . 29
Long production period property,
Phonographic equipment (See Recordkeeping:
requirements for the special
Listed property) Listed property . . . . . . . . . . . . . . . . . . 63
allowance . . . . . . . . . . . . . . . . . . . . . . 23
Photographic equipment (See Section 179 . . . . . . . . . . . . . . . . . . . . . 22
Listed property) Recovery periods:
M Placed in service: ADS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Maximum deduction: Before 1987 . . . . . . . . . . . . . . . . . . . . . 8 GDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Electric vehicles . . . . . . . . . . . . . . . . 61 Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Related persons . . . . . . . 6, 9, 16, 24,
Passenger automobiles . . . . . . . . . 60 Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
35, 57
Trucks . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Property:
Vans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Rent-to-own property,
Classes . . . . . . . . . . . . . . . . . . . . . . . . . 31
defined . . . . . . . . . . . . . . . . . . . . . . . . . 32
Mobile home (See Residential rental Depreciable . . . . . . . . . . . . . . . . . . . . . . 3
property) Rental home (See Residential rental
Idle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
property)
Modified ACRS (MACRS): Improvements . . . . . . . . . . . . . . . . . . 12
Addition or improvement . . . . . . . . 36 Intangible . . . . . . . . . . . . . . . . . . . . . . . . 6 Rented property,
Alternative Depreciation System Leased . . . . . . . . . . . . . . . . . . . . . . 4, 16 improvements . . . . . . . . . . . . . . . . . 12
(ADS) . . . . . . . . . . . . . . . . . . . . . . . . 30 Listed . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Conventions . . . . . . . . . . . . . . . . . . . . 36 Personal . . . . . . . . . . . . . . . . . . . . . . . . . 8 Residential rental property . . . . . . 32
Declining balance method . . . . . . 42 Real . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Retail motor fuels outlet . . . . . . . . . 33
Depreciation methods . . . . . . . . . . 37 Retired from service . . . . . . . . . . . . . 7 Revoking:
Farm property . . . . . . . . . . . . . . . . . . 38 Tangible personal . . . . . . . . . . . . . . 15 ADS election . . . . . . . . . . . . . . . . . . . . 31
Page 108
Revoking: (Cont.) Recapture . . . . . . . . . . . . . . . . . . . . . . 22 Tax help . . . . . . . . . . . . . . . . . . . . . . . . . . 66

General asset account Recordkeeping . . . . . . . . . . . . . . . . . 22 Taxpayer Advocate . . . . . . . . . . . . . . 66
election . . . . . . . . . . . . . . . . . . . . . . . 52 S corporation rules . . . . . . . . . . . . . 21 Term interest . . . . . . . . . . . . . . . . . . . . . . 6
Section 179 election . . . . . . . . . . . . 22 Section 197 intangibles . . . . . . . . . . 6 Trade-in of property . . . . . . . . . . . . . 17
Settlement fees . . . . . . . . . . . . . . . . . . 11 Trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
S Short tax year: TTY/TDD information . . . . . . . . . . . . 66
Sale of property . . . . . . . . . . . . . . . . . . 41 Figuring depreciation . . . . . . . . . . . 47
Section 179 deduction: Figuring placed-in-service
U
Business use required . . . . . . . . . . 16 date . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Unadjusted basis . . . . . . . . . . . . . . . . 39
Carryover . . . . . . . . . . . . . . . . . . . . . . . 20 Software, computer . . . . . . . . 6, 10, 15
Useful life . . . . . . . . . . . . . . . . . . . . . . . . . 5
Dispositions . . . . . . . . . . . . . . . . . . . . 22 Sound recording . . . . . . . . . . . . . . . . . 10
Electing . . . . . . . . . . . . . . . . . . . . . . . . . 22 Special depreciation allowance:
Limits: Election not to claim . . . . . . . . . . . . 29 V
Business (taxable) Qualified Gulf Opportunity Zone Vans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
income . . . . . . . . . . . . . . . . . . . . . 19 property . . . . . . . . . . . . . . . . . . . . . . 27 Video tape . . . . . . . . . . . . . . . . . . . . . . . . 10
Business-use, recapture . . . . . . 22 Qualified Liberty Zone Video-recording equipment (See
Dollar . . . . . . . . . . . . . . . . . . . . . . . . . 17 property . . . . . . . . . . . . . . . . . . . . . . 26 Listed property)
Enterprise zone business . . . . 18 Qualified property . . . . . . . . . . . . . . . 23
Gulf Opportunity Zone Recapture . . . . . . . . . . . . . . . . . . . . . . 29 W
property . . . . . . . . . . . . . . . . . . . . 18 Stock, constructive ownership When to use ADS . . . . . . . . . . . . . . . . 30
Liberty Zone property . . . . . . . . 18 of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Worksheet:
Partial business use . . . . . . . . . . 16 Straight line method . . . . . . . . . . 9, 42 Leased listed property . . . . . . . . . . 59
Married filing separate Created intangibles . . . . . . . . . . . . . 10 MACRS . . . . . . . . . . . . . . . . . . . . . . . . . 40
returns . . . . . . . . . . . . . . . . . . . . . . . 19 Subscription list (See Section 197 Passenger automobile . . . . . . . . . . 61
Partnership rules . . . . . . . . . . . . . . . 20 intangibles)
Property: Suggestions for publication . . . . . 3 ■
Eligible . . . . . . . . . . . . . . . . . . . . . . . 15
Excepted . . . . . . . . . . . . . . . . . . . . . 16
Purchase required . . . . . . . . . . . . . . 16 T
Tangible personal property . . . . . 15
Page 109
See How To Get Tax Help for a variety of ways to get publications, including by
Tax Publications for Business Taxpayers computer, phone, and mail.
General Guides 510 Excise Taxes for 2006 598 Tax on Unrelated Business Income of
515 Withholding of Tax on Nonresident Exempt Organizations
1 Your Rights as a Taxpayer Aliens and Foreign Entities 686 Certification for Reduced Tax Rates in
17 Your Federal Income Tax (For 517 Social Security and Other Information Tax Treaty Countries
Individuals) for Members of the Clergy and 901 U.S. Tax Treaties
334 Tax Guide for Small Business (For Religious Workers 908 Bankruptcy Tax Guide
Individuals Who Use Schedule C or 527 Residential Rental Property 925 Passive Activity and At-Risk Rules
C-EZ) 534 Depreciating Property Placed in 946 How To Depreciate Property
509 Tax Calendars for 2006 Service Before 1987 947 Practice Before the IRS and Power of
553 Highlights of 2005 Tax Changes 535 Business Expenses Attorney
910 Guide to Free Tax Services 536 Net Operating Losses (NOLs) for 954 Tax Incentives for Distressed
Individuals, Estates, and Trusts Communities
Employer’s Guides 537 Installment Sales 1544 Reporting Cash Payments of Over
538 Accounting Periods and Methods $10,000 (Received in a Trade or
15 (Circular E), Employer’s Tax Guide
541 Partnerships Business)
15-A Employer’s Supplemental Tax Guide
542 Corporations 1546 The Taxpayer Advocate Service of the
15-B Employer’s Tax Guide to Fringe
544 Sales and Other Dispositions of Assets IRS—How to Get Help With
Benefits
551 Basis of Assets Unresolved Tax Problems
51 (Circular A), Agricultural Employer’s
Tax Guide 556 Examination of Returns, Appeal Rights,
80 (Circular SS), Federal Tax Guide For and Claims for Refund Spanish Language Publications
Employers in the U.S. Virgin Islands, 560 Retirement Plans for Small Business
(SEP, SIMPLE, and Qualified Plans) 1SP Derechos del Contribuyente
Guam, American Samoa, and the 179 (Circular PR), Guía Contributiva Federal
Commonwealth of the Northern 561 Determining the Value of Donated
Mariana Islands Property Para Patronos Puertorriqueños
926 Household Employer’s Tax Guide 583 Starting a Business and Keeping 579SP Cómo Preparar la Declaración de
Records Impuesto Federal
587 Business Use of Your Home (Including 594SP Qué es lo Debemos Saber Sobre El
Specialized Publications Proceso de Cobro del IRS
Use by Daycare Providers)
225 Farmer’s Tax Guide 594 What You Should Know About The 850 English-Spanish Glossary of Words
IRS Collection Process and Phrases Used in Publications
378 Fuel Tax Credits and Refunds
Issued by the Internal Revenue
463 Travel, Entertainment, Gift, and Car 595 Capital Construction Fund for Service
Expenses Commercial Fishermen
1544SP Informe de Pagos en Efectivo en
505 Tax Withholding and Estimated Tax 597 Information on the United States- Exceso de $10,000 (Recibidos en
Canada Income Tax Treaty una Ocupación o Negocio)
Commonly Used Tax Forms See How To Get Tax Help for a variety of ways to get forms, including by computer, phone,
and mail.
Form Number and Title Form Number and Title

W-2 Wage and Tax Statement 1120S U.S. Income Tax Return for an S Corporation
W-4 Employee’s Withholding Allowance Certificate Sch D Capital Gains and Losses and Built-In Gains
940 Employer’s Annual Federal Unemployment Sch K-1 Shareholder’s Share of Income,
(FUTA) Tax Return Deductions, Credits, etc.
940-EZ Employer’s Annual Federal Unemployment 2106 Employee Business Expenses
(FUTA) Tax Return 2106-EZ Unreimbursed Employee Business
941 Employer’s Quarterly Federal Tax Return Expenses
1040 U.S. Individual Income Tax Return 2210 Underpayment of Estimated Tax by Individuals,
Sch A & B Itemized Deductions & Interest and Estates, and Trusts
Ordinary Dividends 2441 Child and Dependent Care Expenses
Sch C Profit or Loss From Business 2848 Power of Attorney and Declaration of
Representative
Sch C-EZ Net Profit From Business
3800 General Business Credit
Sch D Capital Gains and Losses
3903 Moving Expenses
Sch D-1 Continuation Sheet for Schedule D
4562 Depreciation and Amortization
Sch E Supplemental Income and Loss
4797 Sales of Business Property
Sch F Profit or Loss From Farming
4868 Application for Automatic Extension of Time To File
Sch H Household Employment Taxes
U.S. Individual Income Tax Return
Sch J Income Averaging for Farmers and Fishermen
5329 Additional Taxes on Qualified Plans (Including
Sch R Credit for the Elderly or the Disabled IRAs) and Other Tax-Favored Accounts
Sch SE Self-Employment Tax
6252 Installment Sale Income
1040-ES Estimated Tax for Individuals
8283 Noncash Charitable Contributions
1040X Amended U.S. Individual Income Tax Return
8300 Report of Cash Payments Over $10,000 Received
1065 U.S. Return of Partnership Income in a Trade or Business
Sch D Capital Gains and Losses 8582 Passive Activity Loss Limitations
Sch K-1 Partner’s Share of Income, 8606 Nondeductible IRAs
Deductions, Credits, etc. 8822 Change of Address
1120 U.S. Corporation Income Tax Return 8829 Expenses for Business Use of Your Home
1120-A U.S. Corporation Short-Form Income
Tax Return
Page 110

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Page 1 of 110 of Publication 946 8:25 - 17-FEB-2006

Department of the Treasury Contents

Property How Do You Treat Improvements? . . . . . . . . . . .

• Section 179 Deduction Deductions? . . . . . . . . . . . . . . . . . . . . . . . . . 13

Appendix B — Table of Class Lives and

Comments and suggestions. We welcome your com- Useful Items

Internal Revenue Service ❏ 534 Depreciating Property Placed in Service

Overview of Adjusted basis

Page 4 Chapter 1 Overview of Depreciation

Chapter 1 Overview of Depreciation Page 5

Intangible property 4. Trademarks or trade names.

Page 6 Chapter 1 Overview of Depreciation

Terms you may need to know Idle Property

Chapter 1 Overview of Depreciation Page 7

Grantor Improvements under Which Recovery Period Applies in

1. You or someone related to you owned or used the

Page 8 Chapter 1 Overview of Depreciation

10. The executor and beneficiary of any estate.

Chapter 1 Overview of Depreciation Page 9

Page 10 Chapter 1 Overview of Depreciation

The nontaxable transfers covered by this rule include Cost as Basis

Assumed debt. If you buy property and assume (or buy

Property changed from personal use. If you held prop-

Chapter 1 Overview of Depreciation Page 11

For a discussion of adjustments to the basis of your prop-

Page 12 Chapter 1 Overview of Depreciation

Listed property Filing an Amended Return

Chapter 1 Overview of Depreciation Page 13

Table 1-1. Purpose of Form 4562

Page 14 Chapter 1 Overview of Depreciation

• It must be acquired for business use.

Introduction Eligible Property

Chapter 2 Electing the Section 179 Deduction Page 15

Page 16 Chapter 2 Electing the Section 179 Deduction

2. The construction, reconstruction, or erection of the Dollar Limits

Chapter 2 Electing the Section 179 Deduction Page 17

Page 18 Chapter 2 Electing the Section 179 Deduction

. • The dollar limit (after reduction for any cost of sec-

Chapter 2 Electing the Section 179 Deduction Page 19

Page 20 Chapter 2 Electing the Section 179 Deduction

Chapter 2 Electing the Section 179 Deduction Page 21

You may have to recapture the section 179 deduction if, in

Page 22 Chapter 2 Electing the Section 179 Deduction

Long Production Period Property

Allowance 1. It is new property of one of the following types.

Useful Items 2. The property has a recovery period of at least 10

Chapter 3 Claiming the Special Depreciation Allowance Page 23

Page 24 Chapter 3 Claiming the Special Depreciation Allowance

Chapter 3 Claiming the Special Depreciation Allowance Page 25

Other Tests To Be Met

Page 26 Chapter 3 Claiming the Special Depreciation Allowance

Chapter 3 Claiming the Special Depreciation Allowance Page 27

Syndicated leasing transactions. If qualified GO Qualified revitalization building. This is a commercial

Excepted Property Figure the special depreciation allowance by multiplying

Page 28 Chapter 3 Claiming the Special Depreciation Allowance

Chapter 3 Claiming the Special Depreciation Allowance Page 29

property) is considered to be depreciation for this purpose Form (and Instructions)