Depreciation and Amortization (Including Information on Listed Property)

Section C Lines 20a Through 20c

Complete lines 20a through 20c for assets, other than automobiles and other listed property, placed in service only during the tax year beginning in 2001 and depreciated under the Alternative Depreciation System (ADS). Report on line 17 MACRS depreciation on assets placed in service in prior years.

Under ADS, use the applicable depreciation method, the applicable recovery period, and the applicable convention to compute depreciation.

The following types of property must be depreciated under ADS.

• Tangible property used predominantly outside the United States.
• Tax-exempt use property.
• Tax-exempt bond financed property.
• Imported property covered by an executive order of the President of the United States.
• Property used predominantly in a farming business and placed in service during any tax year in which you made an election under section 263A(d)(3).

Instead of depreciating property under GDS (line 19), you may make an irrevocable election with respect to any classification of property for any tax year to use ADS. For residential rental and nonresidential real property, you may make this election separately for each property.

Column (a). Use the following rules to determine the classification of the property under ADS.

Class life. Under ADS, the depreciation deduction for most property is based on the property's class life. See the Table of Class Lives and Recovery Periods in Pub. 946. Use line 20a for all property depreciated under ADS, except property that does not have a class life, residential rental and nonresidential real property, water utility property, and railroad gradings and tunnel bores.

See section 168(g)(3) for special rules for determining the class life for certain property. The class life for qualified New York Liberty Zone leasehold improvement property under ADS is 9 years.

12-year property. Use line 20b for property that does not have a class life.

40-year property. Use line 20c for residential rental and nonresidential real property.

Water utility property and railroad gradings and tunnel bores. These assets are 50-year property under ADS. There is no separate line to report 50-year property. Therefore, attach a statement showing the same information 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.

Column (b). For 40-year property, enter the month and year placed in service or converted to use in a trade or business or for the production of income.

Column (c). See the instructions for line 19, column (c).

Column (d). On line 20a, enter the property's class life.

Column (e). Under ADS, the applicable conventions are the same as those used under GDS. See the instructions for line 19, column (e).

Column (g). Figure the depreciation deduction in the same manner as under GDS, except use the straight line method over the ADS recovery period and use the applicable convention.

Part IV - Summary

Line 22

A partnership (other than an electing large partnership) or S corporation does not include any section 179 expense deduction (line 12) on this line. Instead, any section 179 expense deduction is passed through separately to the partners and shareholders on the appropriate line of their Schedules K-1.

Line 23

If you are subject to the uniform capitalization rules of section 263A, enter the increase in basis from costs you must capitalize. For a detailed discussion of who is subject to these rules, which costs must be capitalized, and allocation of costs among activities, see Regulations section 1.263A-1.

Part V - Listed Property

If you claim the standard mileage rate, actual vehicle expenses (including depreciation), or depreciation on other listed property, you must provide the information requested in Part V, regardless of the tax year the property was placed in service. However, if you file Form 2106, 2106-EZ, or Schedule C-EZ (Form 1040), report this information on that form and not in Part V. 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.

Section A Line 25

An additional 30% depreciation deduction is allowed for qualified property placed in service after September 10, 2001. See the instructions for line 14 for the definition of qualified property and how to figure the deduction. This special depreciation allowance is included in the overall limit on depreciation and section 179 expense deduction for passenger automobiles. However, the limit is increased for passenger automobiles for which the special depreciation allowance is claimed. See the instructions for lines 26 and 27 for details on the limit. Enter on line 25 your total special depreciation allowance for all listed property.

Lines 26 and 27

Qualified business use. To determine whether to use line 26 or line 27 to report your listed property, you must first determine the percentage of qualified business use for each property. Generally, a qualified business use is any use in your trade or business. However, it does not include any of the following.

• Investment use.
• Leasing the property to a 5% owner or related person.
• The use of the property as compensation for services performed by a 5% owner or related person.
• The use of the property as compensation for services performed by any person (who is not a 5% owner or related person), unless an amount is included in that person's income for the use of the property and, if required, income tax was withheld on that amount.

Exception. If at least 25% of the total use of any aircraft during the tax year is for a qualified business use, the leasing or compensatory use of the aircraft by a 5% owner or related person is treated as a qualified business use.

Determine your percentage of qualified business use similar to the method used to figure the business/investment use percentage in column (c). Your percentage of qualified business use may be smaller than the business/investment use percentage.

For more information, see Pub. 946.

Column (a). List on a property-by-property basis all your listed property in the following order.

1. Automobiles and other vehicles.
2. Other listed property (computers and peripheral equipment, etc.).

See Listed Property on page 1 for items to include.

In column (a), list the make and model of automobiles, and give a general description of other listed property.

If you have more than five vehicles used 100% for business/investment purposes, you may group them by tax year. Otherwise, list each vehicle separately.

Column (b). Enter the date the property was placed in service. If property held for personal use is converted to business/investment use, treat the property as placed in service on the date of conversion.

Column (c). Enter the percentage of business/investment use. For automobiles and other vehicles, determine this percentage by dividing the number of miles the vehicle is driven for trade or business purposes or for the production of income during the year (not to include any commuting mileage) by the total number of miles the vehicle is driven for all purposes. Treat vehicles used by employees as being used 100% for business/investment purposes if the value of personal use is included in the employees' gross income, or the employees reimburse the employer for the personal use.

Employers who report the amount of personal use of the vehicle in the employee's gross income, and withhold the appropriate taxes, should enter 100% for the percentage of business/investment use. For more information, see Pub. 463.

For listed property (such as computers or video equipment), allocate the use based on the most appropriate unit of time the property is actually used. See Temporary Regulations section 1.280F-6T.

If during the tax year you convert property used solely for personal purposes to business/investment use, figure the percentage of business/investment use only for the number of months you use the property in your business or for the production of income. Multiply that percentage by the number of months you use the property in your business or for the production of income, and divide the result by 12.

Column (d). Enter the property's actual cost (including sales tax) or other basis (unadjusted for prior years' depreciation). If you traded in old property, your basis is the adjusted basis of the old property (figured as if 100% of the property's use had been for business/investment purposes) plus any additional amount you paid for the new property.

For a vehicle, reduce your basis by any diesel-powered highway vehicle credit, qualified electric vehicle credit, or deduction for clean-fuel vehicles you claimed.

If you converted the property from personal use to business/investment use, your basis for depreciation is the smaller of the property's adjusted basis or its fair market value on the date of conversion.

Column (e). Multiply column (d) by the percentage in column (c). From that result, subtract any section 179 expense deduction, any special depreciation allowance, and half of any investment credit taken before 1986 (unless you took the reduced credit). For automobiles and other listed property placed in service after 1985 (i.e., transition property), reduce the depreciable basis by the entire investment credit.

Column (f). Enter the recovery period. For property placed in service after 1986 and used more than 50% in a qualified business use, use the table in the line 19, column (d), instructions on page 5. For property placed in service after 1986 and used 50% or less in a qualified business use, depreciate the property using the straight line method over its ADS recovery period. The ADS recovery period is 5 years for automobiles and computers.

Column (g). Enter the method and convention used to figure your depreciation deduction. See the instructions for line 19, columns (e) and (f), on page 5. Write 200 DB, 150 DB, or S/L, for the depreciation method, and HY, MM, or MQ, for half-year, mid-month, or mid-quarter conventions, respectively. For property placed in service before 1987, write PRE if you used the prescribed percentages under ACRS. If you elected an alternate percentage, enter S/L.

Column (h). See Limits for passenger automobiles on page 8 before entering an amount in column (h).

For property used more than 50% in a qualified business use (line 26) and placed in service after 1986, figure column (h) by following the instructions for line 19, column (g), on page 6. If placed in service before 1987, multiply column (e) by the applicable percentage given in Pub. 534 for ACRS property. If the recovery period for an automobile ended before your tax year beginning in 2001, enter your unrecovered basis, if any, in column (h).

For property used 50% or less in a qualified business use (line 27) and placed in service after 1986, figure column (h) by dividing column (e) by column (f) and using the same conventions as discussed in the instructions for line 19, column (e), on page 5. The amount in column (h) cannot exceed the property's unrecovered basis. If the recovery period for an automobile ended before your tax year beginning in 2001, enter your unrecovered basis, if any, in column (h).

For property placed in service before 1987 that was disposed of during the year, enter zero.

Limits for passenger automobiles. The depreciation deduction, including any special depreciation allowance, plus section 179 expense deduction for passenger automobiles is limited for any tax year.

Definitions. Passenger automobiles are 4-wheeled vehicles manufactured primarily for use on public roads that are rated at 6,000 pounds unloaded gross vehicle weight or less. For a truck or van, gross vehicle weight is substituted for unloaded gross vehicle weight. Electric passenger automobiles are vehicles produced by an original equipment manufacturer and designed to run primarily on electricity.

Exception. The following vehicles are not considered passenger automobiles.

• An ambulance, hearse, or combination ambulance-hearse used in your trade or business.
• A vehicle used in your trade or business of transporting persons or property for compensation or hire.

For any passenger automobile (including an electric passenger automobile) you list on line 26 or line 27, the total of columns (h) and (i) on line 26 or 27 and column (h) on line 25 for that automobile cannot exceed the applicable limit shown in Table 1, 2, or 3 below. If the business/investment use percentage in column (c) for the automobile is less than 100%, you must reduce the applicable limit to an amount equal to the limit multiplied by that percentage. For example, for an automobile (other than an electric automobile) placed in service in January 2001 (by a calendar year taxpayer) that is used 60% for business/investment, the limit is $1,836 ($3,060 x 60%).

Column (i). Enter the amount you elect to expense for section 179 property used more than 50% in a qualified business use (subject to the limits for passenger automobiles noted above). Refer to the Part I instructions to determine if the property qualifies under section 179.

Recapture of depreciation and section 179 expense deduction. For listed property used more than 50% in a qualified business use in the year placed in service and used 50% or less in a later year, you may have to recapture in the later year part of the depreciation and section 179 expense deduction. Use Form 4797, Sales of Business Property, to figure the recapture amount.

Section B

Except as noted below, you must complete lines 30 through 36 for each vehicle identified in Section A. Employees must provide their employers with the information requested on lines 30 through 36 for each automobile or vehicle provided for their use.

Exception. Employers are not required to complete lines 30 through 36 for vehicles used by employees who are not more than 5% owners or related persons and for which the question on line 37, 38, 39, 40, or 41 is answered Yes.

Section C

Employers providing vehicles to their employees satisfy the employer's substantiation requirements under section 274(d) by maintaining a written policy statement that:

• Prohibits personal use including commuting or
• Prohibits personal use except for commuting.

An employee does not need to keep a separate set of records for any vehicle that satisfies these written policy statement rules.

For both written policy statements, there must be evidence that would enable the IRS to determine whether use of the vehicle meets the conditions stated below.

Line 37

A policy statement that prohibits personal use (including commuting) must meet all of the following conditions.

• The employer owns or leases the vehicle and provides it to one or more employees for use in the employer's trade or business.
• When the vehicle is not used in the employer's trade or business, it is kept on the employer's business premises, unless it is temporarily located elsewhere (e.g., for maintenance or because of a mechanical failure).
• No employee using the vehicle lives at the employer's business premises.
• No employee may use the vehicle for personal purposes, other than de minimis personal use (e.g., a stop for lunch between two business deliveries).
• Except for de minimis use, the employer reasonably believes that no employee uses the vehicle for any personal purpose.

Line 38

A policy statement that prohibits personal use (except for commuting) is not available if the commuting employee is an officer, director, or 1% or more owner. This policy must meet all of the following conditions.

• The employer owns or leases the vehicle and provides it to one or more employees for use in the employer's trade or business, and it is used in the employer's trade or business.
• For bona fide noncompensatory business reasons, the employer requires the employee to commute to and/or from work in the vehicle.
• The employer establishes a written policy under which the employee may not use the vehicle for personal purposes, other than commuting or de minimis personal use (e.g., a stop for a personal errand between a business delivery and the employee's home).
• Except for de minimis use, the employer reasonably believes that the employee does not use the vehicle for any personal purpose other than commuting.
• The employer accounts for the commuting use by including an appropriate amount in the employee's gross income.

Line 40

An employer that provides more than five vehicles to its employees who are not 5% owners or related persons need not complete Section B for such vehicles. Instead, the employer must obtain the information from its employees and retain the information received.

Line 41

An automobile meets the requirements for qualified demonstration use if the employer maintains a written policy statement that:

• Prohibits its use by individuals other than full-time automobile salespersons,
• Prohibits its use for personal vacation trips,
• Prohibits storage of personal possessions in the automobile, and
• Limits the total mileage outside the salesperson's normal working hours.

Part VI-Amortization

Each year you may elect to deduct part of certain capital costs over a fixed period. If you amortize property, the part you amortize does not qualify for the section 179 expense deduction or for depreciation.

Amortization of bond premiums. For individuals reporting amortization of bond premium for bonds acquired before October 23, 1986, do not report the deduction here. See the instructions for Schedule A (Form 1040), line 27.

For taxpayers (other than corporations) claiming a deduction for amortization of bond premium for bonds acquired after October 22, 1986, but before January 1, 1988, the deduction is treated as interest expense and is subject to the investment interest limitations. Use Form 4952, Investment Interest Expense Deduction, to compute the allowable deduction.

For taxable bonds acquired after 1987, the amortization offsets the interest income. See Pub. 550, Investment Income and Expenses.

Line 42

Complete line 42 only for those costs for which the amortization period begins during your tax year beginning in 2001.

Column (a). Describe the costs you are amortizing. You may amortize the following.

• Pollution control facilities (section 169, limited by section 291 for corporations).
• Certain bond premiums (section 171).
• Research and experimental expenditures (section 174).
• The cost of acquiring a lease (section 178).
• Qualified forestation and reforestation costs (section 194). See Pub. 535 for limitations. Partnerships and S corporations, see the line 44 instructions below.
• Qualified revitalization expenditures (section 1400I). These are certain capital expenditures that relate to a qualified revitalization building located in an area designated as a renewal community. The amount of qualified revitalization expenditures cannot exceed the commercial revitalization expenditure amount allocated to the qualified revitalization building by the commercial revitalization agency for the state in which the building is located. You may elect to either (a) deduct one-half of the expenditures for the year the building is placed in service or (b) amortize all such expenditures ratably over the 120-month period beginning with the month the building is placed in service. Report any amortization on line 42. Report any deductions on the applicable Other Deductions or Other Expenses line of your return.
• Organizational expenditures for a corporation (section 248) or partnership (section 709).
• Optional write-off of certain tax preferences over the period specified in section 59(e).
• Certain section 197 intangibles (which must be amortized over 15 years starting with the month the intangibles were acquired), including:
  1. Goodwill;
  2. Going concern value;
  3. Workforce in place;
  4. Business books and records, operating systems, or any other information base;
  5. Any patent, copyright, formula, process, design, pattern, know-how, format, or similar item;
  6. Any customer-based intangible (e.g., composition of market or market share);
  7. Any supplier-based intangible;
  8. Any license, permit, or other right granted by a governmental unit;
  9. Any covenant not to compete entered into in connection with the acquisition of a business; and
  10. Any franchise (other than a sports franchise), trademark, or trade name.
• Business start-up expenditures (section 195). To elect to amortize start-up expenditures, attach a statement to your income tax return containing:
  1. A detailed description of the trade or business,
  2. The month in which the active trade or business began (or was acquired),
  3. The number of months in the amortization period you are selecting (cannot be less than 60), and
  4. A description of each start-up expenditure incurred (whether or not paid).

The statement must be filed by the due date, including extensions, of your return for the year in which the active trade or business begins. If you timely filed that return without making the election, you can still make the election on an amended return filed within 6 months of the due date, excluding extensions, of that return. Write Filed pursuant to section 301.9100-2 on the amended return. See Regulations section 1.195-1 for more details

Column (b). Enter the date the amortization period begins under the applicable Code section.

Column (c). Enter the total amount you are amortizing. See the applicable Code section for limits on the amortizable amount.

Column (d). Enter the Code section under which you amortize the costs.

Column (f). Compute the amortization deduction by:

1. Dividing column (c) by the number of months over which the costs are to be amortized and multiplying the result by the number of months in the amortization period included in your tax year beginning in 2001 or
2. Multiplying column (c) by the percentage in column (e).

Attach any other information the Code and regulations may require to make a valid election. See Pub. 535 for more information.

Line 44

Report the total amortization, including the allowable portion of forestation or reforestation amortization, on the applicable Other Deductions or Other Expenses line of your return. For more details, including limitations that apply, see Pub. 535. Partnerships (other than electing large partnerships) and S corporations, report the amortizable basis of any forestation or reforestation expenses for which amortization is elected and the year in which the amortization begins as a separately stated item on Schedules K and K-1 (Form 1065 or 1120S). See the instructions for Schedule K (Form 1065 or 1120S) for more details on how to report.

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