Which Convention Applies?

Under MACRS, averaging conventions establish when the recovery period begins and ends. The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. Use one of the following conventions.

• The half-year convention.
• The mid-month convention.
• The mid-quarter convention.

The mid-month convention.   Use this convention for all nonresidential real property and residential rental property.

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 a one-half month of depreciation is allowed for the month the property is placed in service or disposed of.

The mid-quarter convention.   Use this convention if the mid-month convention does not apply and the total depreciable bases of MACRS property you placed in service during the last 3 months of the tax year (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) are more than 40% of the total depreciable bases of all MACRS property you placed in service during the year.

Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter. This means that 1½ months of depreciation is allowed for the quarter the property is placed in service or disposed of.

The half-year convention.   Use this convention if neither the mid-quarter convention nor the mid-month convention applies.

Under this convention, you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of the year. This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of.

Which Depreciation Method Applies?

MACRS provides three depreciation methods under GDS and one depreciation method under ADS.

• The 200% declining balance method over a GDS recovery period.
• The 150% declining balance method over a GDS recovery period.
• The straight line method over a GDS recovery period.
• The straight line method over an ADS recovery period.

You cannot use the 200% declining balance method for property placed in service in a farming business after 1988.

Property used in farming business.   For personal property placed in service in a farming business after 1988 you must use the 150% declining balance method over a GDS recovery period or you can elect one of the following methods.

• The straight line method over a GDS recovery period.
• The straight line method over an ADS recovery period.

For property placed in service before 1999, you could have elected to use the 150% declining balance method using the ADS recovery periods for certain property classes. If you made this election, continue to use the same method and recovery period for that property.

Real property.   You can depreciate real property using the straight line method under either GDS or ADS.

Depreciation Table.   The following table lists the types of property you can depreciate under each method. The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL.

Depreciation Table

System/Method		Type of Property
GDS using 150% DB	·	All property used in a farming business (except real property)
	·	All 15- and 20-year property
	·	Nonfarm 3-, 5-, 7-, and 10-year property 1
GDS using SL	·	Nonresidential real property
	·	Residential rental property
	·	Trees or vines bearing fruit or nuts
	·	All 3-, 5-, 7-, 10-, 15-, and 20-year property 1
ADS using SL	·	Property used predomi- nantly outside the U.S.
	·	Farm property used when an election not to apply the uniform capitalization rules is in effect
	·	Tax-exempt property
	·	Tax-exempt bond-financed property
	·	Imported property 2
	·	Any property for which you elect to use this method 1
GDS using 200% DB	·	Nonfarm 3-, 5-, 7-, and 10-year property

1Elective method

2See section 168(g)(6) of the Internal Revenue  Code

Switching to straight line.   If you use a declining balance method, you switch to the straight line method in the year it provides an equal or greater deduction. If you use the MACRS percentage tables, discussed later under How Is the Depreciation Deduction Figured, you do not need to determine in which year your deduction is greater using the straight line method. The tables have the switch to the straight line method built into their rates.

Fruit or nut trees and vines.   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a 10-year recovery period.

ADS required for some farmers.   If you elect not to apply the uniform capitalization rules to any plant shown in Table 7-1 of chapter 7 and produced in your farming business, you must use ADS for all property you place in service in any year the election is in effect. See chapter 7 for a discussion of the application of the uniform capitalization rules to farm property.

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 considered 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.

Example 1.   If you are in the trade or business of growing fruits and vegetables, you can harvest, wash, inspect, and package the fruits and vegetables for sale. Such activities are normally part of the raising of these crops by farmers. You will be considered to be in the business of farming with respect to the growing of fruits and vegetables and the processing activities that are part of their harvest.

Example 2.   You are in the business of growing and harvesting wheat and other grains. You also process grain you have harvested in order to produce breads, cereals, and other similar food products. You then sell these products to customers in the course of your business. Although you are in the farming business with respect to the growing and harvesting of grain, you are not in the farming business with respect to the processing of the grain to produce the food products.

Electing a different method.   As shown in the Depreciation Table, 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 6 months of the due date of your 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 during the year of the election. However, you can make the election on a property-by-property basis for residential rental and nonresidential real property.

Straight line election.   Instead of using the declining balance method, you can elect to use the straight line method over the GDS recovery period. Make the election by entering S/L in column (f) of Part III of Form 4562.

ADS election.   As explained earlier under Which Depreciation System (GDS or ADS) Applies, you can elect to use ADS even though your property may come under GDS. ADS uses the straight line method of depreciation over the ADS recovery periods, which are generally longer than the GDS recovery periods. The ADS recovery periods for many assets used in the business of farming are listed in Table 8-1. Additional ADS recovery periods for other classes of property may be found in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946.

Make the election by completing line 20, Part III of Form 4562.

How Is the Depreciation Deduction Figured?

To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed-in-service date, basis amount, recovery period, convention, and depreciation method that applies to your property. Then you are ready to figure your depreciation deduction. You can figure it in one of two ways.

• You can use the percentage tables provided by the IRS.
• You can figure your own deduction without using the tables.

Figuring your own MACRS deduction will generally result in a slightly different amount than using the tables.

Using the MACRS Percentage Tables

To help you figure your deduction under MACRS, the IRS has established percentage tables that incorporate the applicable convention and depreciation method. These percentage tables are in Appendix A of Publication 946.

Rules for using the tables.   The following rules cover the use of the percentage tables.

1. You must apply the rates in the percentage tables to your property's unadjusted basis (defined later).
2. You cannot use the percentage tables for a short tax year. See chapter 4 of Publication 946 for information on how to figure the deduction for a short tax year.
3. You generally must continue to use them for the entire recovery period of the property.
4. You must stop using the tables if you adjust the basis of the property for any reason other than
   1. Depreciation allowed or allowable, or
   2. An addition or improvement to the property. (An addition or improvement is depreciated as a separate property.)

Table 8-2. 150% Declining Balance Method

Year	3-Year	5-Year	7-Year	20-Year
1	25.0%	15.00%	10.71%	3.750%
2	37.5	25.50	19.13	7.219
3	25.0	17.85	15.03	6.677
4	12.5	16.66	12.25	6.177
5		16.66	12.25	5.713
6		8.33	12.25	5.285
7			12.25	4.888
8			6.13	4.522

Basis adjustment due to casualty loss.   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. For the year of the adjustment and the remaining recovery period, you must figure the depreciation yourself using the property's adjusted basis at the end of the year. See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946.

Figuring the unadjusted basis of your property.   You must apply the table rates to your property's unadjusted basis each year of the recovery period. Unadjusted basis is the same basis amount you would use to figure gain on a sale but figured without reducing your original basis by any MACRS depreciation taken in earlier years. However, you do reduce your original basis by the following amounts.

• Any amortization taken on the property.
• Any section 179 deduction claimed on the property.
• Any special depreciation allowance.
• Any deduction claimed for a clean-fuel vehicle or clean-fuel vehicle refueling property.
• Any electric vehicle credit. (The lesser of $4,000 or 10% of the cost of the vehicle, even if the credit is less than that amount.)

The clean-fuel vehicle and clean-fuel vehicle refueling property deductions and the credit for electric vehicles are discussed in chapter 12 of Publication 535.

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.

Figuring depreciation using the 150% DB method and half-year convention.   Table 8-2 has the percentages for 3-, 5-, 7-, and 20-year property. The percentages are based on the 150% declining balance method with a change to the straight line method. This table covers only the half-year convention and the first 8 years for 20-year property. See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention.

The following examples show how to figure depreciation under MACRS using the percentages in Table 8-2.

Example 1.   During the year, you bought an item of 7-year property for $10,000 and placed it in service. You do not elect a section 179 deduction for this property and elect not to claim the special depreciation allowance. The unadjusted basis of the property is $10,000. You use the percentages in Table 8-2 to figure your deduction.

Since this is 7-year property, you multiply $10,000 by 10.71% to get this year's depreciation of $1,071. For next year, your depreciation will be $1,913 ($10,000 × 19.13%).

Example 2.   You had a barn constructed on your farm at a cost of $20,000. You placed the barn in service this year. You elect not to claim the special depreciation allowance. The barn is 20-year property and you use the table percentages to figure your deduction. You figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 3.75% to get $750. For next year, your depreciation will be $1,443.80 ($20,000 × 7.219%).

Figuring depreciation using the straight line method and half-year convention.   The following table has the straight line percentages for 3-, 5-, 7-, and 20-year property using the half-year convention. The table covers only the first 8 years for 20-year property. See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention.

Straight Line Percentages

Year	3-Year		5-Year		7-Year		20-Year
1	16.67	%	10	%	7.14	%	2.5	%
2	33.33		20		14.29		5.0
3	33.33		20		14.29		5.0
4	16.67		20		14.28		5.0
5			20		14.29		5.0
6			10		14.28		5.0
7					14.29		5.0
8					7.14		5.0

The following example shows how to figure depreciation under MACRS using the straight line percentages in the table.

Example.   If in Example 2 you had elected the straight line method, you figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 2.5% to get $500. For next year, your depreciation will be $1,000 ($20,000 × 5%).

Figuring Depreciation Without the Tables.

If you are required to or would prefer to figure your own depreciation without using the tables, see Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946.

Figuring the Deduction for Carried-Over-Basis Property

If your property has a carried-over basis because you acquired it in an exchange or involuntary conversion of other property or in a nontaxable transfer, you may have to figure depreciation for the property as if the exchange, conversion, or transfer had not occurred.

Property acquired in an exchange or involuntary conversion.   You generally must depreciate MACRS property that you acquired in a like-kind exchange or an involuntary conversion of other MACRS property over the remaining recovery period of the exchanged or involuntarily converted property. You also generally continue to use the same depreciation method and convention used for the exchanged or converted property. You can depreciate the part of the acquired property's basis in excess of its carried-over basis (the adjusted basis of the exchanged or converted property) as newly purchased MACRS property. For information on like-kind exchanges, see chapter 10. For information on involuntary conversions, see chapter 1 in Publication 544.

If you placed the acquired MACRS property in service before January 3, 2000, you continue to use your original method of depreciating that property.

Property acquired in a nontaxable transfer.   You must depreciate MACRS property acquired by a corporation or partnership in certain nontaxable transfers over the property's remaining recovery period in the transferor's hands, as if the transfer had not occurred. You must continue to use the same depreciation method and convention as the transferor. You can depreciate the part of the property's basis in excess of its carried-over basis (the transferor's adjusted basis in the property) as newly purchased MACRS property. For information on the kinds of nontaxable transfers covered by this rule, see chapter 4 of Publication 946.

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