Part II - Special Depreciation Allowance and Other Depreciation

Line 14

For qualified property (defined below) placed in service during the tax year, an additional 30% special depreciation allowance applies for the first year the property is 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.
• Credit for employer-provided childcare facilities and services.
• Basis adjustment to investment credit property under section 50(c).

Note:    If you acquired the property through a trade-in, see Notice 2000-4, 2000-1 C.B. 313. You can find Notice 2000-4 on page 313 of Internal Revenue Bulletin 2000-3 at www.irs.gov/pub/irs-irbs/irb00-03.pdf.

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
• Qualified Liberty Zone property (defined in section 1400L(b)(2)), other than qualified Liberty Zone leasehold improvement property, not otherwise treated as qualified property.

Qualified property also must meet the following rules.

• The original use of the property (except for qualified Liberty Zone property) must begin with you. For qualified Liberty Zone property, only the original use of the property within the Liberty Zone must begin with you.
• You must have acquired 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) (that is, not property for which you elected to use ADS).
• Qualified Liberty Zone leasehold improvement property (defined in section 1400L(c)(2)).

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 regular depreciation or amortization deduction by the amount deducted. Also, you will not have any AMT adjustment for the property.

Election out.   You may elect, for any class of property, not to treat as qualified property all property in such class placed in service during the tax year. If you make the election, the property may be subject to an AMT adjustment for depreciation. To make the election, attach a statement to your timely filed return indicating that you are electing not to claim the additional allowance and the class of property for which you are making the election. For more details, see Rev. Proc. 2002-33. You can find Rev. Proc. 2002-33 on page 963 of Internal Revenue Bulletin 2002-20 at www.irs.gov/pub/irs-irbs/irb02-20.pdf.

Note:   If you timely filed your return without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Write Filed pursuant to section 301.9100-2 on the amended return.

Once made, the election may not be revoked without IRS consent.

Line 15

Report on this line depreciation for 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, credit for employer-provided childcare facilities and services, 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 2002 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 2002 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 2002. 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 Liberty Zone leasehold improvement property.

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 does not apply to 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).

(a) Class life (in years) (See Pub. 946)	(b) Classification
4 or less	3-year property
More than 4 but less than 10	5-year property
10 or more but less than 16	7-year property
16 or more but less than 20	10-year property
20 or more but less than 25	15-year property
25 or more	20-year property

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, credit for employer-provided childcare facilities and services, and any special depreciation allowance included on line 14. See section 50(c) to determine the basis adjustment for investment credit property.

Note:   If you acquired the property through a trade-in, see Notice 2000-4, 2000-1 C.B. 313. You can find Notice 2000-4 on page 313 of Internal Revenue Bulletin 2000-3 at www.irs.gov/pub/irs-irbs/irb00-03.pdf.

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.

Recovery Period for Most Property

Classification	Recovery period
3-year property	3 yrs.
5-year property	5 yrs.
7-year property	7 yrs.
10-year property	10 yrs.
15-year property	15 yrs.
20-year property	20 yrs.
25-year property	25 yrs.
Residential rental property	27.5 yrs.
Nonresidential real property	39 yrs.
Railroad gradings and tunnel bores	50 yrs.

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.

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).

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. However, you may 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.

• 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 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 AMT 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.

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)).

Half-year (HY) convention		0.5
Mid-quarter (MQ) convention
Placed in service (or disposed of) during the:	Placed in service	Disposed of
1st quarter	0.875	0.125
2nd quarter	0.625	0.375
3rd quarter	0.375	0.625
4th quarter	0.125	0.875

Mid-month (MM) convention
Placed in service (or disposed of) during the:	Placed in service	Disposed of
1st month	0.9583	0.0417
2nd month	0.8750	0.1250
3rd month	0.7917	0.2083
4th month	0.7083	0.2917
5th month	0.6250	0.3750
6th month	0.5417	0.4583
7th month	0.4583	0.5417
8th month	0.3750	0.6250
9th month	0.2917	0.7083
10th month	0.2083	0.7917
11th month	0.1250	0.8750
12th month	0.0417	0.9583

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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