Once you determine that your property can be depreciated under
MACRS and whether it falls under GDS or ADS, you are ready to figure
your deduction. To help you figure your deduction, the IRS has
established percentage tables. To use these percentage tables to
figure your MACRS deduction each year, you need to know the following
information about your property.
- Its basis.
- Its property class and recovery period.
- The date it was placed in service.
- Which convention to use.
- Which depreciation method to use.
Basis
Words you may need to know (see Glossary):
- Abstract fees
- Adjusted basis
- Basis
- Business/investment use
- Fair market value (FMV)
- Nontaxable exchange
- Taxable exchange
To figure your depreciation deduction, you must determine the basis
of your property. To determine basis, you need to know the cost or
other basis of your property. If you bought the property, your basis
is the amount you paid for the property plus amounts you paid for
items such as sales tax, freight charges, and installation and testing
fees. "Other basis" refers to basis that is determined by the way
you received the property. For example, you may have received the
property through an exchange, for services you performed, as a gift,
or as an inheritance. If you received property in this or some other
way, see Publication 551
to determine your basis.
Cost as Basis
The basis for property is generally its cost. The cost includes the
amount you pay in cash, in debt obligation, in other property, or in
services.
Assumed debt.
If you buy property and assume (or buy subject to) an existing
mortgage or other debt on the property, your basis includes the amount
you assume.
Example.
You pay a $20,000 down payment for property and assume the seller's
mortgage of $120,000. Your total cost is $140,000, the cash you paid
plus the mortgage you assumed.
Settlement fees and other costs.
The basis of real property also includes certain fees and charges
you pay with the purchase. These fees are generally shown on your
settlement statement.
If you buy real property and agree to pay the real estate taxes the
seller owed and the seller did not reimburse you, add the taxes you
pay to the basis of your property. Other fees or charges you pay that
you should add to the basis of your property include the following.
- Legal and recording fees.
- Abstract fees.
- Survey charges.
- Title insurance.
- Amounts the seller owed, such as interest, recording or
mortgage fees, and sales commissions.
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
determine the basis of your property. For information about the
uniform capitalization rules, see Publication 551.
Adjusted Basis
You may have to make certain adjustments (increases and decreases)
to the basis of property for events occurring between the time you
acquired the property and the time you placed it in service. These
events could include the following.
- Installing utility lines.
- Legal fees for perfecting the title.
- Settling zoning issues.
- Removing barriers.
- Receiving rebates.
For a discussion of adjustments to the basis of your property,
see Adjusted Basis in Publication 551.
Property Changed
From Personal Use
If you held property for personal use and later change it to
business use or use in the production of income, your basis is the
lesser of the following.
- The fair market value (FMV) of the property on the date you
change it from personal use.
- Your original cost or other basis adjusted as follows.
- Increased by the cost of any permanent improvements or
additions and other costs that must be added to basis.
- Decreased by any tax deductions you claimed for casualty and
theft losses and other items that reduced your basis.
Example.
Several years ago Nia paid $160,000 to have her home built on a lot
that cost her $10,000. Before changing the property to rental use last
year, she paid $20,000 for permanent improvements to the house and
claimed a $2,000 casualty loss deduction for damage to the house.
Because land is not depreciable, she can only include the cost of the
house when figuring the basis for depreciation.
Nia's adjusted basis in the house when she changed it to business
use was $178,000 ($160,000 + $20,000 - $2,000). On the same date
her property had an FMV of $180,000, of which $30,000 was for the land
and $150,000 was for the house. The basis for depreciation on the
house is the FMV ($150,000), because it is less than her adjusted
basis ($178,000).
Use of Property
If you use an item of property for more than one purpose, you must
determine how much of your use of the property is for each of the
following.
- Business use
- Investment use
- Personal use
Combine investment use with business use to figure your
depreciation deductions. Do not consider investment use, however, when
determining whether listed property is used predominantly in a
qualified business use. Listed property and the predominant use test
are discussed in chapter 4.
Property Classes and
Recovery Periods
Words you may need to know (see Glossary):
- Basis
- Class life
- Placed in service
- Property class
- Recovery period
- Section 1250 property
- Straight line method
-
Under MACRS, property is assigned to one of several property
classes. These property classes are based on pre-established class
lives and establish the recovery periods (number of years) over which
you recover the basis of your property. For example, property with a
class life of 4 years or less is in the 3-year property class and has
a 3-year recovery period. Class lives and recovery periods for most
property can be found in the Appendix B, Table of Class Lives and
Recovery Periods.
GDS
Under GDS, most tangible property is assigned to one of eight main
property classes. The following is a list of the property classes and
examples of the types of property included in each class.
- 3-year property.
- Tractor units for over-the-road use.
- Any race horse over 2 years old when placed in
service.
- Any other horse over 12 years old when placed in
service.
- Qualified rent-to-own property.
- 5-year property.
- Automobiles, taxis, buses, and trucks.
- Computers and peripheral equipment.
- Office machinery (such as typewriters, calculators, and
copiers).
- Any property used in research and experimentation.
- Breeding cattle and dairy cattle.
- 7-year property.
- Office furniture and fixtures (such as desks, files, and
safes).
- Any property that does not have a class life and has not
been designated by law as being in any other class.
- 10-year property.
- Vessels, barges, tugs, and similar water transportation
equipment.
- Any single purpose agricultural or horticultural
structure.
- Any tree or vine bearing fruits or nuts.
- 15-year property.
- Certain depreciable improvements made directly to land or
added to it (such as shrubbery, fences, roads, and bridges).
- Service station buildings and other land improvements used
in the marketing of petroleum and petroleum products (but not
facilities related to petroleum and natural gas trunk
pipelines).
- 20-year property. This class includes farm
buildings (other than single purpose agricultural or horticultural
structures).
- Residential rental property. This class includes
real property such as a rental home or structure (including a mobile
home) if 80% or more of its gross rental income for the tax year is
from dwelling units. A dwelling unit is a house or apartment used to
provide living accommodations in a building or structure. It does not
include a unit in a hotel, motel, inn, or other establishment where
more than half the units are used on a transient basis. If you occupy
any part of the building or structure for personal use, its gross
rental income includes the fair rental value of the part you occupy.
The recovery period for this property is 27.5 years.
- Nonresidential real property. This class includes
section 1250 property that is neither of the following.
- Residential rental property (defined in (7)).
- Property with a class life of less than 27.5 years.
The recovery period for nonresidential real property is:
- 39 years for property you placed in service
after May 12, 1993, or
- 31.5 years for property you placed in service
before May 13, 1993.
However, property you placed in service before January 1, 1994,
will not be subject to the longer recovery period if you or a
"qualified person" entered into a binding written contract to
purchase or construct the property before May 13, 1993, or you (or a
qualified person) began construction of the property before May 13,
1993. A qualified person is anyone who transfers a contract
or property to you so long as the property was not placed in service
by the transferor.
Office in the home.
If you begin to use part of your home as an office, depreciate that
part of your home as nonresidential real property over 39 years (31.5
years if you began using it for business before May 13,
1993) under GDS. See Publication 587
for a discussion of the tests you
must meet to claim expenses, including depreciation, for the business
use of your home.
Rent-to-own property.
Qualified rent-to-own property is property held by a rent-to-own
dealer for purposes of being subject to a rent-to-own contract. You
can depreciate qualified rent-to-own property under GDS over 3 years
(5 years if you placed it in service before August 6,
1997).
Rent-to-own dealer.
You are a rent-to-own dealer if you meet all the following
requirements.
- You regularly enter into rent-to-own contracts in the
ordinary course of your business.
- A substantial portion of these contracts end with the
customer returning the property before making all the payments
required to transfer ownership.
- The property is tangible personal property of a type
generally used within the home for personal use.
Rent-to-own contract.
This is any lease for the use of consumer property between a
rent-to-own dealer and a customer who is an individual. The lease
contract must meet all the following rules.
- Must be titled "Rent-to-Own Agreement," "Lease
Agreement with Ownership Option," or other similar language.
- Provide a beginning date and a maximum period of time not to
exceed 156 weeks or 36 months from the beginning date, for which the
contract can be in effect (including renewals or options to
extend).
- Provide for regular periodic weekly or monthly payments that
can be either level or decreasing. If the payments are decreasing, no
payment can be less than 40 percent of the largest payment.
- Provide for total payments to generally exceed the normal
retail price of the property plus interest.
- Provide for total payments that do not exceed $10,000 for
each item of property.
- Provide that the customer has no legal obligation to make
all payments outlined in the contract and that at the end of each
weekly or monthly payment period, the customer can either continue to
use the property by making the next payment or return the property in
good working order and be free of any further obligations and not
entitled to a return of any prior payments.
- Provide that legal title to the property remains with the
rent-to-own dealer until the customer makes either all the required
payments or the early purchase payments required under the contract to
acquire legal title.
- Provide that the customer has no right to sell, sublease,
mortgage, pawn, pledge, or otherwise dispose of the property until all
contract payments have been made.
Qualified rent-to-own property.
This is tangible personal property generally used in the home for
personal use. It includes computers and peripheral equipment,
televisions, videocassette recorders, stereos, camcorders, appliances,
furniture, washing machines and dryers, refrigerators, and other
similar consumer durable property. Consumer durable property does not
include real property, aircraft, boats, motor vehicles, or trailers.
If some of the property you rent to others under a rent-to-own
agreement is of a type that may be used by the renters for either
personal or business purposes, you can still treat this property as
qualified property as long as it does not represent a significant
portion of your leasing property. But, if this dual-use property does
represent a significant portion of your leasing property, you must
prove that this property is qualified rent-to-own property.
Water utility property.
Depreciate water utility property you place in service after June
12, 1996 (unless you placed it in service under a binding contract in
effect before June 10, 1996, and at all times until you place the
property in service), using the straight line method over a 25-year
recovery period.
Water utility property is either of the following.
- Property that is an integral part of the gathering,
treatment, or commercial distribution of water, and that, without
regard to this provision, would have a 20-year recovery period.
- Any municipal sewer.
Gas station convenience stores (retail motor fuels outlet).
Depreciable real property that is a retail motor fuels outlet
(whether or not it sells food or other convenience items) placed in
service after August 19, 1996, is 15-year property. If you placed the
property in service before August 20, 1996, you could have chosen to
treat it as 15-year property.
Retail motor fuels outlet.
Real property is a retail motor fuels outlet if it is used to a
substantial extent in the retail marketing of petroleum or petroleum
products and it meets any one of the following three tests.
- It is not larger than 1,400 square feet.
- 50% or more of the gross revenues generated from the
property are derived from petroleum sales.
- 50% or more of the floor space in the property is devoted to
petroleum marketing sales.
A retail motor fuels outlet does not include any facility
related to petroleum and natural gas trunk pipelines.
Personal home changed to rental use.
If you begin to rent a home after 1986 that was your personal home
before 1987, you depreciate it as residential rental property over
27.5 years under GDS.
Additions or improvements to property.
The recovery period for an addition or improvement you make to any
property, including leased property, is the one that would apply to
the underlying property if you had placed it in service at the same
time you placed the addition or improvement in service. The recovery
period begins on the later of the following dates.
- The date you place the addition or improvement in
service.
- The date you place the property to which you made the
addition or improvement in service.
Example.
You own a rental home which you have been renting out since 1981.
If you put an addition on the home and place the addition in service
this year, you would use MACRS to figure your depreciation deduction
for the addition. Under GDS, the property class for the addition is
residential rental property and its recovery period is 27.5 years
because the home to which the addition is made would be residential
rental property if you had placed it in service this year.
Property Used on Indian Reservations
You can use shorter recovery periods for qualified property you
placed in service on an Indian reservation after 1993 and before 2004.
These recovery periods are discussed later under Recovery
periods.
Qualified property.
Property eligible for the shorter recovery periods are 3-, 5-, 7-,
10-, 15-, and 20-year property and nonresidential real property. You
must use this property predominantly in the active conduct of a trade
or business within an Indian reservation. Real property you rent to
others that is located on an Indian reservation is also eligible for
the shorter recovery periods.
The following property is not qualified property.
- Property used or located outside an Indian reservation on a
regular basis.
- Property acquired directly or indirectly from a related
person (discussed later).
- Property placed in service for purposes of conducting or
housing class I, II, or III gaming activities. (These activities are
defined in section 4 of the Indian Regulatory Act (25 U.S.C.
2703)).
- Any property you must depreciate under the Alternative
Depreciation System (ADS). Determine whether property is qualified
without regard to the election to use ADS and after applying the
special rules for listed property not used predominantly in a
qualified business (discussed in chapter 4).
Qualified infrastructure property.
Item (1) above does not apply to qualified infrastructure property
located outside the reservation that is used to connect with qualified
infrastructure property within the reservation. Qualified
infrastructure property is property that meets all the following
rules.
- It is qualified property, as defined earlier, except that it
is outside the reservation.
- It benefits the tribal infrastructure.
- It is available to the general public.
- It is placed in service in connection with the active
conduct of a trade or business within a reservation.
Infrastructure property includes, but is not limited to, roads,
power lines, water systems, railroad spurs, and communications
facilities.
Related person.
A related person is either of the following.
- A person who bears a relationship to you as described in the
list of related persons in chapter 2,
except that 10% is substituted
for 50% each place it appears and related persons also include
brothers and sisters.
- A person with whom you are engaged in trades or businesses
that are under common control as described in section 52(a) and 52(b)
of the Internal Revenue Code.
Indian reservation.
The term "Indian reservation" means a reservation as defined
in section 3(d) of the Indian Financing Act of 1974 (25 U.S.C.
1452(d)) or section 4(10) of the Indian Child Welfare Act of 1978 (25
U.S.C. 1903(10)). For a definition of the term "former Indian
reservations in Oklahoma" as used in section 3(d) of the Indian
Financing Act of 1974, see Notice 98-45 in Cumulative Bulletin
1998-2. Cumulative Bulletins are available at many libraries and
Internal Revenue Service offices.
Recovery periods.
The following table shows the shorter recovery periods you can use
for qualified property.
Recovery Periods for
Qualified Indian Reservation Property
|
Property Class |
Recovery Period |
| 3-year |
2 years |
| 5-year |
3 years |
| 7-year |
4 years |
| 10-year |
6 years |
| 15-year |
9 years |
| 20-year |
12 years |
| Nonresidential real property |
22 years |
ADS
As discussed earlier under When To Use ADS, you must use
ADS for certain property or you can elect to use ADS for property that
qualifies for GDS. This election is discussed later under
Election of ADS. If you use ADS, you will recover the cost
of your property using the straight line method of depreciation. The
recovery periods for most property are generally longer under ADS than
they are under GDS. The following table shows some of the ADS recovery
periods.
ADS Recovery Periods
|
Property |
Recovery
Period |
| Rent-to-own property |
4 years |
| Automobiles and light duty trucks |
5 years |
| Computers and peripheral equipment |
5 years |
| High technology telephone station equipment
installed |
| on customer premises |
5 years |
| High technology medical equipment |
5 years |
| Personal property with no class life |
12 years |
| Single purpose agricultural and horticultural
structures |
15 years |
| Any tree or vine bearing fruit or nuts |
20 years |
| Nonresidential real and residential rental
property |
40 years |
| Section 1245 real property not listed in
Appendix B |
40 years |
| Railroad grading and tunnel bore |
50 years |
The ADS recovery periods for property not listed above can be found
in the tables in Appendix B.
Placed-in-Service Date
As discussed in chapter 1,
property is placed in service when it is
ready and available for a specific use. Depreciation begins when you
place your property in service in a trade or business or for the
production of income. If you place property in service for personal
use, you cannot claim depreciation. If you change the property use to
a business or income-producing activity, you begin to depreciate it at
the time of the change in use.
Example 1.
Donald Steep bought a machine for his business. The machine was
delivered last year. However, it was not installed and operational
until this year. It is considered placed in service this year. If the
machine had been ready and available for use when it was delivered, it
would be considered placed in service last year even if it was not
actually used until this year.
Example 2.
On April 6, Sue Thorn bought a house to use as residential rental
property. She made several repairs and had it ready for rent on July
5. At that time, she 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.
Example 3.
James Elm is a building contractor who specializes in constructing
office buildings. He bought a truck last year that had to be modified
to lift materials to second-story levels. The installation of the
lifting equipment was completed and James accepted delivery of the
modified truck on January 10 of this year. The truck was placed in
service on January 10, the date it was ready and available to perform
the function for which it was bought.
MACRS Property Acquired by an
Exchange or Involuntary Conversion
If, after January 2, 2000, you placed in service MACRS property
that was acquired in a like-kind exchange or an involuntary conversion
for other MACRS property, you generally depreciate the acquired
property over the remaining recovery period of the exchanged or
involuntarily converted MACRS property. You also generally continue to
use the same depreciation method and convention of the exchanged or
involuntarily converted property. Any excess of the basis in the
acquired MACRS property over the adjusted basis in the exchanged or
involuntarily converted MACRS property is depreciated as newly
purchased MACRS property. However, if land or other non-depreciable
property is acquired in an exchange or an involuntary conversion for
depreciable property, you cannot depreciate the land or other
non-depreciable property. For more information on like-kind exchanges
and involuntary conversions, see chapter 1 in Publication 544.
If you acquired MACRS property in a like-kind exchange or in an
involuntary conversion for other MACRS property and you placed the
acquired property in service before January 3, 2000, you can continue
to use your present method of depreciating that property. However, if
you treated the acquired property as newly purchased property, you can
change your method of accounting for that property and depreciate it
using the rules for property acquired and placed in service after
January 2, 2000. See Form 3115 for information on changing your method
of accounting.
Conventions
Words you may need to know (see Glossary):
- Basis
- Clean-fuel vehicle
- Clean-fuel vehicle refueling property
- Disposed
- Nonresidential real property
- Placed in service
- Residential rental property
To figure your depreciation deduction for both the year in which
you place property in service and the year in which you dispose of the
property, you use one of the following conventions.
- The half-year convention.
- The mid-month convention.
- The mid-quarter convention.
The Half-Year Convention
Under the half-year 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 means that no matter
when in the year you begin or end the use of the property, you treat
it as if you began or ended its use in the middle of the year.
Generally, you use the half-year convention for property other than
nonresidential real and residential rental property. In certain
circumstances, you may have to use the mid-quarter convention
(discussed later).
The Mid-Month Convention
Under this convention, you treat all property placed in service or
disposed of during a month as placed in service or disposed of at the
midpoint of the month. This means that no matter when during a month
you place property in service or dispose of it, you treat it as being
placed in service or disposed of in the middle of the month.
You use the mid-month convention for the following types of
property.
- Nonresidential real property.
- Residential rental property.
The Mid-Quarter Convention
Under the mid-quarter 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 quarter. This means that no matter
when during a quarter you place property in service or dispose of it,
you treat it as being placed in service or disposed of in the middle
of the quarter.
You must use the mid-quarter convention when the total depreciable
bases of MACRS property you placed in service during the last three
months of your tax year are more than 40% of the total depreciable
bases of all MACRS property you placed in service during the entire
year. When that happens, you must use this convention for all MACRS
property you placed in service during the year. To determine the total
bases of property, do not include the following.
- Nonresidential real property.
- Residential rental property.
- Property you placed in service and disposed of in the same
year.
To determine whether you must use the mid-quarter convention, the
depreciable basis of property is your basis multiplied by the
percentage of business/investment use and then reduced by the
following.
- Any amortization taken on the property.
- Any section 179 deduction claimed on the property.
- Any deduction claimed for clean-fuel vehicles or for
clean-fuel vehicle refueling property.
Depreciation Methods
Words you may need to know (see Glossary):
- Declining balance method
- Listed property
- Nonresidential real property
- Placed in service
- Property class
- Recovery period
- Residential rental property
- Straight line method
The three methods used to figure depreciation under MACRS are 200%
declining balance, 150% declining balance, and straight line.
Depending on the property being depreciated, all three methods can be
used under GDS. Only the straight line method can be used under ADS.
GDS recovery periods are generally shorter than the ADS recovery
periods.
The following table lists the types of property you can depreciate
under each method. It also gives a brief explanation of the method.
The declining balance method is abbreviated as DB and the straight
line method is abbreviated as SL.
Depreciation Methods
| Method |
Type of Property |
Benefit |
| GDS using 200% DB |
� Nonfarm 3-, 5-, 7-, and
10-year property |
Provides a greater deduction during the earlier
recovery years. Changes to SL when that method provides a greater
deduction.*** |
| GDS using 150% DB |
� All farm property (except real
property) |
Provides a greater deduction during the |
| � All 15- and 20-year property |
earlier recovery years. |
| � Nonfarm 3-, 5-, 7-, and
10-year property* |
Changes to SL when that method provides a greater
deduction.*** |
| GDS using |
� Nonresidential real property |
Provides for equal |
| SL |
� Residential rental property |
yearly deductions |
| � Trees or vines bearing fruit
or nuts |
(except for the first and last years). |
| � All 3-, 5-, 7-, 10-, 15-, and
20-year property* |
| ADS using SL |
� Listed property used 50% or
less for business |
Provides for equal yearly deductions. |
| � Property used predominantly
outside the U.S. |
| � Tax-exempt property |
| � Tax-exempt bond-financed
property |
| � Imported property** |
| � Any property for which you
elect to use this method* |
| * Elective method |
| ** See section 168(g)(6) of the Internal Revenue
Code. |
| ***The MACRS percentage tables in Appendix A have the
switch to the straight line method built into their
rates. |
Electing a Different Method
As shown in the table Depreciation Methods, you can
elect a different method for depreciation for certain types of
property. You must make the election by the due date of the return
(including extensions) for the year you placed the property in
service. However, if you timely filed your return for the year without
making the election, you can still make the election by filing an
amended return within six months of the due date of the return
(excluding extensions). Attach the election to the amended return and
write "FILED PURSUANT TO SECTION 301.9100-2" on the
election statement. File the amended return at the same address you
filed the original return. Once you make the election, you cannot
change it.
If you elect to use a different method for one item in a property
class you must apply the same method to all property in that class
placed in service in the year of the election. However, you can make
the election on a property-by-property basis for nonresidential real
and residential rental property.
150% election.
Instead of using the 200% declining balance method over the GDS
recovery period for nonfarm property in the 3-, 5-, 7-, and 10-year
property classes, you can elect to use the 150% declining balance
method. Make the election by entering "150 DB" under column (f)
in Part II of Form 4562.
For property placed in service before 1999, you could have elected
to use the 150% declining balance method using the ADS recovery
periods. If you made this election, continue to use the same method
and recovery period for that property.
Straight line election.
Instead of using either the 200% or 150% declining balance methods
over the GDS recovery period, you can elect to use the straight line
method over the GDS recovery period. Make the election by entering
"SL" under column (f) in Part II of Form 4562.
Election of ADS.
Although your property may come under GDS, you can elect to use
ADS. ADS uses the straight line method of depreciation over fixed ADS
recovery periods. Most ADS recovery periods are listed in Appendix B
or see the table ADS Recovery Periods, earlier.
Make the election by completing line 16 in Part II of Form 4562.
Farm property.
Instead of using the 150% declining balance rate over a GDS
recovery period for property you use in a farming business, you can
elect to depreciate it using either of the following methods.
- The straight line method over a GDS recovery period.
- The straight line method over the ADS recovery period.
Depreciation Methods for Farm Property
If you place personal property in service in a farming business
after 1988, you can depreciate it under GDS using any method other
than the 200% declining balance method. You can depreciate real
property using the straight line method under either GDS or ADS.
For a quick reference to the MACRS methods, see the table
Depreciation Methods, earlier.
Farming business.
A farming business is any trade or business involving cultivating
land or raising or harvesting any agricultural or horticultural
commodity. A farming business includes the following.
- Operating a nursery or sod farm.
- Raising or harvesting crops.
- Raising or harvesting trees bearing fruit, nuts, or other
crops.
- Raising ornamental trees. An evergreen tree is not an
ornamental tree if it is more than 6 years old when it is severed from
its roots.
- Raising, shearing, feeding, caring for, training, and
managing animals.
Processing activities.
In general, a farming business includes processing activities that
are normally part of the growing, raising, or harvesting of
agricultural products. However, a farming business generally does not
include the processing of commodities or products beyond those
activities that are normally part of the growing, raising, or
harvesting of such products.
Fruit or nut trees and vines.
Depreciate trees and vines 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 ADS for all property you place in service in any year the election
is in effect. See the regulations under section 263A of the Internal
Revenue Code for information on the uniform capitalization rules that
apply to farm property.
MACRS Percentage Tables
Words you may need to know (see Glossary):
- Adjusted basis
- Amortization
- Basis
- Business/investment use
- Convention
- Placed in service
- Property class
- Recovery period
Appendix A near the end of this publication contains percentage
tables you can use to figure your depreciation under MACRS.
Rules Covering the Use of the Tables
The following rules cover the use of the percentage tables.
- You must apply the rates in the percentage tables to your
property's unadjusted basis.
- You cannot use the percentage tables for a short tax year.
See MACRS Deduction in Short Tax Year, later for
information on figuring the deduction.
- Once you start using the percentage tables, you must
continue to use them for the entire recovery period of the
property.
- If you adjust the basis of the property for any
reason other than those listed in (a) and (b), you must stop
using the tables.
- Depreciation allowed or allowable.
- An addition or improvement to that property that is
depreciated as a separate item of property.
Figuring unadjusted basis.
You must apply the table rates to your property's unadjusted basis
each year of the recovery period. Unadjusted basis is the
same amount you would use to figure gain on a sale, but you figure it
without taking into account any depreciation taken in earlier years.
However, you do reduce your original basis by any of the following
that apply.
- Any amortization taken on the property.
- Any section 179 deduction claimed.
- Any deduction claimed for clean-fuel vehicle or clean-fuel
vehicle refueling property.
- Any electric vehicle credit. (This is the lesser of $4,000
or 10% of the cost of the vehicle, even if the credit is less than
that amount.)
For business property you purchase during the year, the unadjusted
basis is its cost minus these adjustments.
If you trade property, your unadjusted basis in the property
received is the cash paid plus the adjusted basis of the property
traded minus these adjustments.
The deductions for clean-fuel vehicles or clean-fuel vehicle
refueling property and any electric vehicle credit are subject to
recapture. If the property is depreciable, and you must recapture part
or all of the deduction or credit, you can increase the basis of the
property by the amount of the deduction or credit recaptured. You can
recover the additional basis over the rest of the recovery period
beginning with the year of recapture. However, if this occurs, you
will no longer be able to use the percentage tables. Instead, for the
year of adjustment and the remaining recovery period, you must figure
the depreciation using the property's adjusted basis at the end of the
year. To determine your depreciation without the tables, see How
To Figure the Deduction Without Using the Tables, later.
The clean-fuel vehicle and clean-fuel vehicle refueling property
deductions and the electric vehicle credit are discussed in chapter 12 of Publication 535.
Adjustment due to casualty loss.
If you reduce the basis of your property because of a casualty, you
cannot continue to use the tables. For the year of adjustment and the
rest of the recovery period, figure the depreciation using the
property's adjusted basis at the end of the year of adjustment.
Example.
On October 26, 1999, Sandra Elm, a calendar year taxpayer, bought
and placed in service in her business an item of 7-year property. It
cost $29,000 and she elected a section 179 deduction of $19,000. Her
unadjusted basis after the section 179 deduction was $10,000. Because
it was the only item placed in service that year and it was placed in
service during the last 3 months of the year, she used the mid-quarter
convention. Because the property has a 7-year recovery period she
figured her deduction using the percentages in Table A-5. For 1999,
her depreciation was $357 ($10,000 x 3.57%).
In July 2000, her property was vandalized and Sandra had a
deductible casualty loss of $3,000. Because she must adjust her
property's basis for the casualty loss, she can no longer use the
percentage tables. Her adjusted basis at the end of 2000, before
figuring her 2000 depreciation, is $6,643. She figures the adjusted
basis by subtracting the 1999 depreciation of $357 and the casualty
loss of $3,000 from the unadjusted basis of $10,000. She can now
figure her depreciation for 2000 without using the percentage tables.
Which Table To Use
Appendix A contains the MACRS Percentage Table Guide,
which is designed to help you locate the correct percentage
table to use for depreciating your property. The MACRS percentage
tables immediately follow the guide.
MACRS Worksheet
This worksheet is intended only to help you and does not replace
Form 4562. Use the information from this worksheet to prepare Form
4562. Also, use a separate worksheet for each item of property. Part I
is used to record information you will need to figure your deduction
in Part II.
Do not use this worksheet for automobiles. Use the Worksheet
for Passenger Automobiles in chapter 4.
MACRS Worksheet
| Part I |
| 1. |
Description of property |
|
| 2. |
Date placed in service |
|
| 3. |
MACRS method (GDS or ADS) |
|
| 4. |
Recovery period |
|
| 5. |
Convention |
|
| 6. |
Depreciation rate (from tables) |
|
| Part II |
| 7. |
Cost or other basis* |
$ |
| 8. |
Business/investment use |
% |
| 9. |
Multiply line 7 by line 8 |
| $ |
| 10. |
Total claimed for section 179 deduction and
clean-fuel vehicle refueling property |
| $ |
| 11. |
Subtract line 10 from line 9. This is your
depreciable (unadjusted) basis |
| $ |
| 12. |
Depreciation rate (from line 6) |
| |
| 13. |
Multiply line 11 by line 12. This is your
depreciation deduction |
| $ |
|
*If real estate, do not include cost (basis) of land.
|
The following example shows how to figure your MACRS depreciation
deduction using the percentage tables and the MACRS worksheet.
Example.
You bought office furniture (7-year property) for $10,000 and
placed it in service on August 11, 2000. You use the furniture only
for business. You did not elect a section 179 deduction. You use GDS
under MACRS and the half-year convention to figure your depreciation.
This is the only property you placed in service this year. You refer
to the MACRS Percentage Table Guide in Appendix A and find
that you should use Table A-1. Because you did not elect a section 179
deduction, your property's unadjusted basis is its cost, $10,000.
Multiply your property's unadjusted basis each year by the percentage
for 7-year property given in Table A-1. You figure your depreciation
deduction using the MACRS worksheet as follows.
MACRS Worksheet
| Part I |
| 1. |
Description of property |
Office furniture |
| 2. |
Date placed in service |
8/11/00 |
| 3. |
MACRS method (GDS or ADS) |
GDS |
| 4. |
Recovery period |
7-Year |
| 5. |
Convention |
Half-Year |
| 6. |
Depreciation rate (from tables) |
.1429 |
| Part II |
| 7. |
Cost or other basis* |
$10,000 |
| 8. |
Business/investment use |
100% |
| 9. |
Multiply line 7 by line 8 |
| $10,000 |
| 10. |
Total claimed for section 179 deduction and
clean-fuel vehicle refueling property |
| -0- |
| 11. |
Subtract line 10 from line 9. This is your
depreciable (unadjusted) basis |
| $10,000 |
| 12. |
Depreciation rate (from line 6) |
| .1429 |
| 13. |
Multiply line 11 by line 12. This is your
depreciation deduction |
| $1,429 |
|
*If real estate, do not include cost (basis) of land.
|
If there are no adjustments to the basis of the property other than
depreciation, your depreciation deduction for each subsequent year of
the recovery period will be as follows.
|
Year |
Basis |
Percentage |
Deduction |
| 2001 |
$10,000 |
24.49% |
$2,449 |
| 2002 |
10,000 |
17.49 |
1,749 |
| 2003 |
10,000 |
12.49 |
1,249 |
| 2004 |
10,000 |
8.93 |
893 |
| 2005 |
10,000 |
8.92 |
892 |
| 2006 |
10,000 |
8.93 |
893 |
| 2007 |
10,000 |
4.46 |
446 |
Examples
The following examples are provided to show you how to use the
percentage tables. In both examples, assume the following.
- You use the property only for business.
- You use the calendar year as your tax year.
- You use GDS for all the properties.
Example 1.
You bought a building and land for $120,000 and placed it in
service on March 8. The sales contract showed the building cost
$100,000 and the land cost $20,000. It is nonresidential real
property. You refer to the MACRS Percentage Table Guide in
Appendix A and find that you should use Table A-7a. The building's
unadjusted basis is its original cost, $100,000. As discussed earlier,
you can never depreciate land.
Because March is the third month of your tax year, multiply the
building's unadjusted basis, $100,000, by the percentages for the
third month in Table A-7a. Your depreciation deduction for each of the
first 3 years is as follows:
|
Year |
Basis |
Percentage |
Deduction |
| 1st |
$100,000 |
2.033% |
$2,033 |
| 2nd |
100,000 |
2.564 |
2,564 |
| 3rd |
100,000 |
2.564 |
2,564 |
Example 2.
During 2000, you bought a machine (7-year property) for $4,000,
office furniture (7-year property) for $1,000, and a computer (5-year
property) for $5,000. You placed the machine in service in January,
the furniture in September, and the computer in October. You do not
elect a section 179 deduction for any of these items.
Because you placed property in service during the last three months
of the year, you must first determine if you have to use the
mid-quarter convention. The total bases of all property you placed in
service in 2000 is $10,000. Because the basis of the computer
($5,000), which you placed in service during the last 3 months (the
fourth quarter) of your tax year, is more than 40% of the total bases
of all property ($10,000) you placed in service during 2000, you must
use the mid-quarter convention for all three items.
You refer to the MACRS Percentage Table Guide in
Appendix A to determine which table you should use under the
mid-quarter convention. Because the machine is 7-year property placed
in service in the first quarter, you use Table A-2. Because the
furniture is 7-year property placed in service in the third quarter,
you use Table A-4. Finally, because the computer is 5-year property
placed in service in the fourth quarter, you use Table A-5. Knowing
what table to use for each property, you figure the depreciation for
the first 2 years as follows.
| Year |
Property Item |
Unadjusted
Basis |
Percentage |
Depreciation
Deduction |
| 2000 |
Machine |
$4,000 |
25.00 |
$1,000 |
| 2001 |
Machine |
4,000 |
21.43 |
857 |
| 2000 |
Furniture |
1,000 |
10.71 |
107 |
| 2001 |
Furniture |
1,000 |
25.51 |
255 |
| 2000 |
Computer |
5,000 |
5.00 |
250 |
| 2001 |
Computer |
5,000 |
38.00 |
1,900 |
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