Glossary

Abstract fees: Expenses generally paid by a buyer to research the title of real property.

Active conduct of a trade or business: To determine if a trade or business is actively conducted requires an examination of all the facts and circumstances. Generally, for the section 179 deduction, a taxpayer is considered to actively conduct a trade or business if he or she meaningfully participates in the management or operations of the trade or business. A mere passive investor in a trade or business does not actively conduct the trade or business.

Adjusted basis: The original cost of property, plus certain additions and improvements, minus certain deductions such as depreciation allowed or allowable and casualty losses.

Amortization: A ratable deduction for the cost of intangible property over its useful life.

Amount realized: The total of all money received plus the fair market value of all property or services received from a sale or exchange. The amount realized also includes any liabilities assumed by the buyer and any liabilities to which the property transferred is subject, such as real estate taxes or a mortgage.

Basis: A way of measuring an individual's investment in property for tax purposes.

Business/investment use: Usually, a percentage showing how much an item of property, such as an automobile, is used for business and investment purposes.

Capitalized: Expended or treated as an item of a capital nature. A capitalized amount is not deductible as a current expense and must be included in the basis of property.

Circumstantial evidence: Details or facts which indirectly point to other facts.

Class life/lives: A number of years that establishes the property class and recovery period for most types of property under the General Depreciation System (GDS) and Alternative Depreciation System (ADS).

Clean-fuel vehicle: Clean-fuel vehicle property is made up of two kinds of property.

1. Motor vehicles produced by an original equipment manufacturer and designed to be propelled by a clean-burning fuel. The only part of a vehicle's basis that qualifies for the deduction is:
   1. A clean-fuel engine that can use a clean-burning fuel,
   2. The property used to store or deliver the fuel to the engine, or
   3. The property used to exhaust gases from the combustion of the fuel.
2. Any property installed on a motor vehicle (including installation costs) to enable it to be propelled by a clean-burning fuel if:
   1. The property is an engine (or modification of an engine) that can use a clean-burning fuel, or
   2. The property is used to store or deliver that fuel to the engine or to exhaust gases from the combustion of that fuel.

Clean-fuel vehicle refueling property: Clean-fuel vehicle refueling property includes any property (other than a building or its structural components) used to:

1. Store or dispense a clean-burning fuel into the fuel tank of a motor vehicle propelled by the fuel, but only if the storage or dispensing is at the point where the fuel is delivered into the tank, or
2. Recharge motor vehicles propelled by electricity, but only if the property is located at the point where the vehicles are recharged.

Commuting: Travel between a personal home and work or job site within the area of an individual's tax home.

Convention: A method established under the Modified Accelerated Cost Recovery System (MACRS) to determine the portion of the year to depreciate property both in the year the property is placed in service and in the year of disposition.

Declining balance method: An accelerated method to depreciate property. The General Depreciation System (GDS) of MACRS uses the 150% and 200% declining balance methods for certain types of property. A depreciation rate (percentage) is determined by dividing the declining balance percentage by the recovery period for the property.

Disposed: Permanently withdrawn from use in a trade or business or from the production of income.

Documentary evidence: Written records which establish certain facts.

Exchange: To barter, swap, part with, give, or transfer property for other property or services.

Fair market value (FMV): The price which property brings when it is offered for sale by one who is willing but not obligated to sell, and is bought by one who is willing or desires to buy but is not compelled to do so.

Fiduciary: The one who acts on behalf of another as a guardian, trustee, executor, administrator, receiver, or conservator.

Fungible commodity: A commodity of a nature that one part may be used in place of another part.

Goodwill: An intangible property such as the advantage or benefit received in property beyond its mere value. It is not confined to a name but can also be attached to a particular area where business is transacted, to a list of customers, or to other elements of value in business as a going concern.

Grantor: The one who transfers property to another.

Listed property: Passenger automobiles, any other property used for transportation, property of a type generally used for entertainment, recreation or amusement, computers and their peripheral equipment (unless used only at a regular business establishment and owned or leased by the person operating the establishment), and cellular telephones or similar telecommunications equipment.

Nonresidential real property: Most real property other than residential rental property.

Nontaxable exchange: An exchange of property in which any gain or loss realized is not recognized (included in or deducted from income) for tax purposes. This usually involves exchanges of like-kind property.

Placed in service: Ready and available for a specific use whether in a trade or business, the production of income, a tax-exempt activity, or a personal activity.

Property class: A category for property under MACRS. It generally determines the depreciation method, recovery period, and convention.

Recovery period: The number of years over which the basis (cost) of an item of property is recovered.

Refueling property: See Clean-fuel vehicle refueling property.

Remainder interest: That part of an estate which is left after all the other provisions of a will have been satisfied.

Residential rental property: Real property, generally buildings or structures, if 80% or more of its annual gross rental income is from dwelling units.

Salvage value: An estimated value of property at the end of its useful life. Not used under MACRS.

Section 1245 property: Property that is or has been subject to an allowance for depreciation or amortization. Section 1245 property includes personal property, single purpose agricultural and horticultural structures, storage facilities used in connection with the distribution of petroleum or primary products of petroleum, and railroad grading or tunnel bores.

Section 1250 property: Real property (other than section 1245 property) which is or has been subject to an allowance for depreciation.

Standard mileage rate: The established amount for optional use in determining a tax deduction for automobiles instead of deducting depreciation and actual operating expenses.

Straight line method: A way to figure depreciation for property that ratably deducts the same amount for each year in the recovery period. The rate (in percentage terms) is determined by dividing 1 by the number of years in the recovery period.

Structural components: Parts that together form an entire structure, such as a building. The term includes those parts of a building such as walls, partitions, floors, and ceilings, as well as any permanent coverings such as paneling or tiling, windows and doors, and all components of a central air conditioning or heating system including motors, compressors, pipes and ducts. It also includes plumbing fixtures such as sinks, bathtubs, electrical wiring and lighting fixtures, and other parts that form the structure.

Taxable exchange: An exchange of property in which the gain or loss is recognized (included in or deducted from income) for tax purposes.

Tax-exempt: Not subject to tax.

Term interest: A life interest in property, an interest in property for a term of years, or an income interest in a trust. It generally refers to a present or future interest in income from property or the right to use property which terminates or fails upon the lapse of time, the occurrence of an event or the failure of an event to occur.

Unadjusted depreciable basis: The basis of an item of property for purposes of figuring gain on a sale without taking into account any depreciation taken in earlier years but with adjustments for amortization, the section 179 deduction, any deduction claimed for clean-fuel vehicles or clean-fuel vehicle refueling property, and any electric vehicle credit.

Unit-of-production method: A way to figure depreciation for certain property. It is determined by estimating the number of units that can be produced before the property is worn out. For example, if it is estimated that a machine will produce 1000 units before its useful life ends, and actually produces 100 units in a year, the percentage to figure depreciation for that year is 10% of the machine's cost less its salvage value.

Useful life: An estimate of how long an item of property can be expected to be usable in trade or business or to produce income. Under MACRS, you recover the cost of property over a set recovery period. The recovery period is based on the property class to which your property is assigned. The class your property is assigned to is generally determined by its class life. The class life for most property is established and listed in Appendix B.

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