Publication 946: How To Depreciate Property; Claiming the Special Depreciation Allowance (or Liberty Zone Depreciation Allowance)

You can take the special depreciation allowance for qualified property. The requirements that have to be met for property to be qualified are the same for both the 30% special depreciation allowance and the 50% special depreciation allowance, except for certain tests explained later under Tests To Be Met For the 30% Allowance and Tests To Be Met For the 50% Allowance. Your property is qualified property if it meets the following requirements.

It is new property of one of the following types.
1. Property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less. Generally, every type of property except real property has a recovery period of 20 years or less. In addition, MACRS is used to depreciate most property. However, the following property cannot be depreciated under MACRS.
  1. Property you placed in service before 1987.
  2. Certain property owned or used in 1986.
  3. Intangible property.
  4. Films, video tapes, and recordings.
  5. Certain corporate or partnership property acquired in a nontaxable transfer.
  6. Property you elected to exclude from MACRS.
  Each type of property listed above is described in chapter 1 under Can You Use MACRS To Depreciate Your Property.
2. Water utility property, which is either of the following.
  1. Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this provision, would be 20-year property.
  2. Any municipal sewer.
3. Computer software that is not a section 197 intangible, which is software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS.)
4. Qualified leasehold improvement property (defined next).
It is property that meets the following tests for either the 30% special depreciation allowance or the 50% special depreciation allowance (explained later under Tests To Be Met For the 30% Allowance and Tests To Be Met For the 50% Allowance).
1. Acquisition date test.
2. Placed in service date test.
3. Original use test.
It is not excepted property (explained later under Excepted Property).

Qualified leasehold improvement property. Generally, this is any improvement to an interior part of a building that is nonresidential real property, provided all the following requirements are met.

The improvement is made under or pursuant to a lease by the lessee (or any sublessee) or the lessor of that part of the building.
That part of the building is to be occupied exclusively by the lessee (or any sublessee) of that part.
The improvement is placed in service more than 3 years after the date the building was first placed in service by any person.
The improvement is section 1250 property. See chapter 3 in Publication 544, Sales and Other Dispositions of Assets, for the definition of section 1250 property.

However, a qualified leasehold improvement does not include any improvement for which the expenditure is attributable to any of the following.

The enlargement of the building.
Any elevator or escalator.
Any structural component benefiting a common area.
The internal structural framework of the building.

Generally, a binding commitment to enter into a lease is treated as a lease and the parties to the commitment are treated as the lessor and lessee. However, a lease between related persons is not treated as a lease.

Related persons. For this purpose, the following are related persons.

Members of an affiliated group.
An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister, ancestor, and lineal descendant.
A corporation and an individual who directly or indirectly owns 80% or more of the value of the outstanding stock of that corporation.
Two corporations that are members of the same controlled group.
A trust fiduciary and a corporation if 80% or more of the value of the outstanding stock is directly or indirectly owned by or for the trust or grantor of the trust.
The grantor and fiduciary, and the fiduciary and beneficiary, of any trust.
The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts.
Certain educational and charitable organizations and any person (or, if that person is an individual, a member of that person's family) who directly or indirectly controls the organization.
Two S corporations, and an S corporation and a regular corporation, if the same persons own 80% or more of the value of the outstanding stock of each corporation.
A corporation and a partnership if the same persons own both of the following.
1. 80% or more of the value of the outstanding stock of the corporation.
2. 80% or more of the capital or profits interest in the partnership.
The executor and beneficiary of any estate.

To be qualified property for the 30% special depreciation allowance, the property must meet all of the following tests.

Acquisition date test. Generally, you must have acquired the property either:

After September 10, 2001, and before January 1, 2005, but only if no written binding contract for the acquisition was in effect before September 11, 2001, or
Pursuant to a written binding contract entered into after September 10, 2001, and before January 1, 2005.

Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after September 10, 2001, and before January 1, 2005. Property that is manufactured, constructed, or produced for your use by another person under a written binding contract entered into before the manufacture, construction, or production of the property, is considered to be manufactured, constructed, or produced by you.

Placed in service date test. Generally, the property must be placed in service for use in your trade or business or for the production of income after September 10, 2001, and before January 1, 2005.

If you sold qualified property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service by you, the property is treated as originally placed in service by the lessor no earlier than the date it is used by you under the leaseback. For special rules explaining when property involved in certain other transactions is treated as originally placed in service, see section 1.168(k)-1T(b)(5) of the regulations.

Original use test. The original use of the property must have begun with you after September 10, 2001. Original use means the first use to which the property is put, whether or not by you. Therefore, property used by any person before September 11, 2001, does not meet the original use test.

Additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test. However, the cost of reconditioned or rebuilt property you acquired does not meet this test. Property containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20 percent of the total cost of the property.

If you sold new property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service by you, the lessor is considered to be the original user of the property. For special rules identifying the original user of property involved in certain other transactions and the original user of fractional interests in property, see section 1.168(k)-1T(b)(3) of the regulations.

To be qualified property for the 50% special depreciation allowance, the property must meet all of the following tests.

Acquisition date test. Generally, you must have acquired the property after May 5, 2003, and before January 1, 2005. If a written binding contract to acquire the property existed before May 6, 2003, the property does not qualify.

Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after May 5, 2003, and before January 1, 2005. Property that is manufactured, constructed, or produced for your use by another person under a written binding contract entered into before the manufacture, construction, or production of the property, is considered to be manufactured, constructed, or produced by you.

Placed in service date test. Generally, the property must be placed in service for use in your trade or business or for the production of income after May 5, 2003, and before January 1, 2005.

If you sold qualified property you placed in service after May 5, 2003, and you leased it back within 3 months after the property was originally placed in service by you, the property is treated as originally placed in service by the lessor no earlier than the date it is used by you under the leaseback. For special rules explaining when property involved in certain other transactions is treated as originally placed in service, see section 1.168(k)-1T(b)(5) of the regulations.

Original use test. The original use of the property must have begun with you after May 5, 2003. Original use means the first use to which the property is put, whether or not by you. Therefore, property used by any person before May 6, 2003, does not meet the original use test.

Additional capital expenditures you incurred to recondition or rebuild your property meet the original use test. However, the cost of reconditioned or rebuilt property you acquired does not meet this test. Property containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20 percent of the total cost of the property.

If you sold new property you placed in service after May 5, 2003, and you leased it back within 3 months after the property was originally placed in service by you, the lessor is considered to be the original user of the property. For special rules identifying the original user of property involved in certain other transactions and the original user of fractional interests in property, see section 1.168(k)-1T(b)(3) of the regulations.

You can elect to claim the 30% special depreciation allowance instead of the 50% special depreciation allowance for property that qualifies for the 50% allowance. This election applies to all property in the same property class placed in service during the year.

Property placed in service and disposed of in the same tax year.
Property converted from business use to personal use in the same tax year it is acquired. (Property converted from personal use to business use in the same or later tax year is not excepted property.)
Property required to be depreciated using the Alternative Depreciation System (ADS). This includes listed property used 50% or less in a qualified business use. For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies, in Chapter 4.
Qualified New York Liberty Zone leasehold improvement property (defined next).
Property for which you elected not to claim any special depreciation allowance (discussed later).

Claiming the Special Depreciation Allowance(or Liberty Zone Depreciation Allowance)

Claiming the Special Depreciation Allowance
(or Liberty Zone Depreciation Allowance)