Depreciation and Amortization (Including Information on Listed Property)

Part II - Special Depreciation Allowance and Other Depreciation

Line 14

For qualified property placed in service after September 10, 2001, an additional 30% special depreciation allowance applies for the first year the property was placed in service. Figure the special allowance by multiplying the depreciable basis of the property by 30%. To figure the depreciable basis, subtract from the business/investment portion of the cost or other basis of the property the total of the following amounts allocable to the property.

• Section 179 expense deduction.
• Deduction for removal of barriers to the disabled and the elderly.
• Disabled access credit.
• Enhanced oil recovery credit.
• Basis adjustment to investment credit property under section 50(c).

Qualified property is:

• Tangible property depreciated under MACRS with a recovery period of 20 years or less,
• Water utility property (see 25-year property on page 5),
• Computer software depreciated under section 167(f)(1),
• Qualified leasehold improvement property (defined in section 168(k)(3)), and
• Any other property that is also qualified New York Liberty Zone property.

Qualified property also must meet the following rules.

• The original use of the property must begin with you, after September 10, 2001.
• You must acquire the property after September 10, 2001. If a binding contract to acquire the property existed before September 11, 2001, the property does not qualify.
• For property you sold and leased back or for self-constructed property, see section 168(k)(2)(D).

Qualified property does not include:

• Listed property used 50% or less in a qualified business use (defined on page 7).
• Any property required to be depreciated under the alternative depreciation system (ADS) of section 168(g) (i.e., property for which you did not elect to use ADS).
• Qualified New York Liberty Zone leasehold improvement property (defined in section 1400L(c)).

You may elect, with respect to any class of property, not to have the additional depreciation deduction apply for all property in such class placed in service during this tax year. To do so, attach a statement to your return indicating the class of property for which you are electing not to claim the additional depreciation deduction.

Enter on line 14 your total special depreciation allowance for all qualified property (other than listed property). See sections 168(k) and 1400L(b) for more details.

If you take the special depreciation allowance, you must reduce the amount on which you figure your depreciation or amortization deduction by the amount deducted.

Line 15

Report property that you elect, under section 168(f)(1), to depreciate under the unit-of-production method or any other method not based on a term of years (other than the retirement-replacement-betterment method).

Attach a separate sheet showing:

• A description of the property and the depreciation method you elect that excludes the property from MACRS or the Accelerated Cost Recovery System (ACRS) and
• The depreciable basis (cost or other basis reduced, if applicable, by salvage value, any section 179 expense deduction, deduction for removal of barriers to the disabled and the elderly, disabled access credit, enhanced oil recovery credit and any special depreciation allowance).

See section 50(c) to determine the basis adjustment for investment credit property.

Line 16

Enter the total depreciation you are claiming for the following types of property (except listed property and property subject to a section 168(f)(1) election).

• ACRS property (pre-1987 rules). See Pub. 534.
• Property placed in service before 1981.
• Certain public utility property which does not meet certain normalization requirements.
• Certain property acquired from related persons.
• Property acquired in certain nonrecognition transactions.
• Certain sound recordings, movies, and videotapes.
• Property depreciated under the income forecast method. The use of the income forecast method is limited to motion picture films, videotapes, sound recordings, copyrights, books, and patents. You cannot use this method to depreciate any amortizable section 197 intangible. See the instructions for line 42 on page 9 for more details on section 197 intangibles.

  Note: If you use the income forecast method for any property placed in service after September 13, 1995, you may owe interest or be entitled to a refund for the 3rd and 10th tax years beginning after the tax year the property was placed in service. For details, see Form 8866, Interest Computation Under the Look-Back Method for Property Depreciated Under the Income Forecast Method.

• Intangible property, other than section 197 intangibles, including:

1. Computer software. Use the straight line method over 36 months.
2. Any right to receive tangible property or services under a contract or granted by a governmental unit (not acquired as part of a business).
3. Any interest in a patent or copyright not acquired as part of a business.
4. Residential mortgage servicing rights. Use the straight line method over 108 months.

See section 167(f) for more details.

Prior years' depreciation, plus current year's depreciation, can never exceed the depreciable basis of the property.

The basis and amounts claimed for depreciation should be part of your permanent books and records. No attachment is necessary.

Part III - MACRS Depreciation

The term Modified Accelerated Cost Recovery System (MACRS) includes the General Depreciation System and the Alternative Depreciation System. Generally, MACRS is used to depreciate any tangible property placed in service after 1986. However, MACRS does not apply to films, videotapes, and sound recordings. See section 168(f) for other exceptions. For more details on MACRS, see Pub. 946.

Section A Line 17

For tangible property placed in service in tax years beginning before 2001 and depreciated under MACRS, enter the deductions for the current year. To figure the deductions, see the instructions for column (g), line 19 on page 6.

Line 18

To simplify the computation of MACRS depreciation, you may elect to group assets into one or more general asset accounts under section 168(i)(4). The assets in each general asset account are depreciated under MACRS as a single asset.

Each account must include only assets that were placed in service during the same tax year with the same asset class (if any), depreciation method, recovery period, and convention. However, an asset cannot be included in a general asset account if the asset is used both for personal purposes and business/investment purposes.

When an asset in an account is disposed of, the amount realized generally must be recognized as ordinary income. The unadjusted depreciable basis and depreciation reserve of the general asset account are not affected as a result of a disposition.

Special rules apply to passenger automobiles, assets generating foreign source income, assets converted to personal use, and certain asset dispositions. For more details, see Regulations section 1.168(i)-1.

To make the election, check the box on line 18. You must make the election on your return filed no later than the due date (including extensions) for the tax year in which the assets included in the general asset account were placed in service. Once made, the election is irrevocable and applies to the tax year for which the election is made and all later tax years.

Section B Lines 19a Through 19i

Use lines 19a through19i only for assets placed in service during the tax year beginning in 2001 and depreciated under the General Depreciation System (GDS), except for automobiles and other listed property (which are reported in Part V).

Column (a). Determine which property you acquired and placed in service during the tax year beginning in 2001. Then, sort that property according to its classification (3-year property, 5-year property, etc.) as shown in column (a) of lines 19a through19i. The classifications for some property are shown below. For property not shown, see Determining the classification on page 5.

3-year property includes:

• A race horse that is more than 2 years old at the time it is placed in service.
• Any horse (other than a race horse) that is more than 12 years old at the time it is placed in service.
• Any qualified rent-to-own property (as defined in section 168(i)(14)).

5-year property includes:

• Automobiles.
• Light general purpose trucks.
• Typewriters, calculators, copiers, and duplicating equipment.
• Any semi-conductor manufacturing equipment.
• Any computer or peripheral equipment.
• Any section 1245 property used in connection with research and experimentation.
• Certain energy property specified in section 168(e)(3)(B)(vi).
• Appliances, carpets, furniture, etc., used in a rental real estate activity.
• Any qualified New York Liberty Zone leasehold improvement property placed in service after September 10, 2001.

7-year property includes:

• Office furniture and equipment.
• Railroad track.
• Any property that does not have a class life and is not otherwise classified.

10-year property includes:

• Vessels, barges, tugs, and similar water transportation equipment.
• Any single purpose agricultural or horticultural structure (see section 168(i)(13)).
• Any tree or vine bearing fruit or nuts.

15-year property includes:

• Any municipal wastewater treatment plant.
• Any telephone distribution plant and comparable equipment used for 2-way exchange of voice and data communications.
• Any section 1250 property that is a retail motor fuels outlet (whether or not food or other convenience items are sold there).

20-year property includes:

• Farm buildings (other than single purpose agricultural or horticultural structures).
• Municipal sewers not classified as 25-year property.

25-year property is water utility property, which is:

• Property that is an integral part of the gathering, treatment, or commercial distribution of water that, without regard to this classification, would be 20-year property.
• Municipal sewers. This classification applies to property placed in service after June 12, 1996, except for property placed in service under a binding contract in effect at all times since June 9, 1996.

Residential rental property is a building in which 80% or more of the total rent is from dwelling units.

Nonresidential real property is any real property that is neither residential rental property nor property with a class life of less than 27.5 years.

50-year property includes any improvements necessary to construct or improve a roadbed or right-of-way for railroad track that qualifies as a railroad grading or tunnel bore under section 168(e)(4).

There is no separate line to report 50-year property. Therefore, attach a statement showing the same information as required in columns (a) through (g). Include the deduction in the line 22 Total and write See attachment in the bottom margin of the form.

Determining the classification. If your depreciable property is not listed above, determine the classification as follows.

1. Find the property's class life. See the Table of Class Lives and Recovery Periods in Pub. 946.
2. Use the following table to find the classification in column (b) that corresponds to the class life of the property in column (a).

Column (b). For lines 19h and 19i, enter the month and year you placed the property in service. If you converted property held for personal use to use in a trade or business or for the production of income, treat the property as being placed in service on the conversion date.

Column (c). To find the basis for depreciation, multiply the cost or other basis of the property by the percentage of business/investment use. From that result, subtract any section 179 expense deduction, deduction for removal of barriers to the disabled and the elderly, disabled access credit, enhanced oil recovery credit and any special depreciation allowance reported on line 14. See section 50(c) to determine the basis adjustment for investment credit property.

Column (d). Determine the recovery period from the table below, unless you acquired qualified Indian reservation property (as defined in section 168(j)(4)). Qualified Indian reservation property does not include property placed in service to conduct class I, II, or III gaming activities. See Pub. 946 for the table for qualified Indian reservation property.

Column (e). The applicable convention determines the portion of the tax year for which depreciation is allowable during a year property is either placed in service or disposed of. There are three types of conventions. To select the correct convention, you must know the type of property and when you placed the property in service.

Half-year convention. This convention applies to all property reported on lines 19a through 19g, unless the mid-quarter convention applies. It does not apply to residential rental property, nonresidential real property, and railroad gradings and tunnel bores. It treats all property placed in service (or disposed of) during any tax year as placed in service (or disposed of) on the midpoint of that tax year. Enter HY in column (e).

Mid-quarter convention. If the total depreciable bases of MACRS property placed in service during the last 3 months of your tax year exceed 40% of the total depreciable bases of MACRS property placed in service during the entire tax year, the mid-quarter, instead of the half-year, convention generally applies. However, certain taxpayers may elect out of the mid-quarter convention as explained below.

In determining whether the mid-quarter convention applies, do not take into account the following.

• Property that is being depreciated under a method other than MACRS.
• Any residential rental property, nonresidential real property, or railroad gradings and tunnel bores.
• Property that is placed in service and disposed of within the same tax year.

The mid-quarter convention treats all property placed in service (or disposed of) during any quarter as placed in service (or disposed of) on the midpoint of that quarter. However, no depreciation is allowed under this convention for property that is placed in service and disposed of within the same tax year. Enter MQ in column (e).

Electing out of the mid-quarter convention. If the 3rd or 4th quarter of your tax year includes September 11, 2001, and you otherwise would be required to use the mid-quarter convention, you may elect to use the half-year convention instead (except for property to which the mid-month convention applies). To make the election, write Election Pursuant to Notice 2001-70 in the top margin of Form 4562.

Mid-month convention. This convention applies only to residential rental property (line 19h), nonresidential real property (line 19i), and railroad gradings and tunnel bores. It treats all property placed in service (or disposed of) during any month as placed in service (or disposed of) on the midpoint of that month. Enter MM in column (e).

Column (f). Applicable depreciation methods are prescribed for each classification of property as follows.

• 3-, 5-, 7-, and 10-year property. Generally, the applicable method is the 200% declining balance method, switching to the straight line method in the first tax year that the straight line rate exceeds the declining balance rate. However, the straight line method is the only applicable method for trees and vines bearing fruit or nuts and qualified New York Liberty Zone leasehold improvement property. For 3-, 5-, 7-, or 10-year property eligible for the 200% declining balance method, you may make an irrevocable election to use the 150% declining balance method, switching to the straight line method in the first tax year that the straight line rate exceeds the declining balance rate. The election applies to all property within the classification for which it is made and that was placed in service during the tax year. You will not have an alternative minimum tax adjustment for any property included under this election.
• 15- and 20-year property and property used in a farming business. The applicable method is the 150% declining balance method, switching to the straight line method in the first tax year that the straight line rate exceeds the declining balance rate.
• Water utility property, residential rental property, nonresidential real property, or any railroad grading or tunnel bore. The only applicable method is the straight line method.

You may also make an irrevocable election to use the straight line method for all property within a classification that is placed in service during the tax year.

Enter 200 DB for 200% declining balance, 150 DB for 150% declining balance, or S/L for straight line.

Column (g). To figure the depreciation deduction you may use optional Tables A through E, starting on page 10. Multiply column (c) by the applicable rate from the appropriate table. See Pub. 946 for complete tables. If you disposed of the property during the current tax year, multiply the result by the applicable decimal amount from the tables in Step 3 below. Or, you may compute the deduction yourself by completing the following steps.

Step 1. Determine the depreciation rate as follows.

• If you are using the 200% or 150% declining balance method in column (f), divide the declining balance rate (use 2.00 for 200 DB or 1.50 for 150 DB) by the number of years in the recovery period in column (d). For example, for property depreciated using the 200 DB method over a recovery period of 5 years, divide 2.00 by 5 for a rate of 40%. You must switch to the straight line rate in the first year that the straight line rate exceeds the declining balance rate.
• If you are using the straight line method, divide 1.00 by the remaining number of years in the recovery period as of the beginning of the tax year (but not less than one). For example, if there are 6½ years remaining in the recovery period as of the beginning of the year, divide 1.00 by 6.5 for a rate of 15.38%.

Step 2. Multiply the percentage rate determined in Step 1 by the property's unrecovered basis (basis for depreciation (as defined in column (c)) reduced by all prior years' depreciation).

Step 3. For property placed in service or disposed of during the current tax year, multiply the result from Step 2 by the applicable decimal amount from the tables below (based on the convention shown in column (e)).

Short tax years. See Pub. 946 for rules on how to compute the depreciation deduction for property placed in service in a short tax year.

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