IRS Releases Pub. 946, How to Depreciate Property

Publication 946

How To Depreciate Property

• Section 179 Deduction
• Special Depreciation Allowance
• MACRS
• Listed Property

For use in preparing 2009 Returns
Increased section 179 deduction dollar limits. The maximum amount you can elect to deduct for most section 179 property you placed in service in 2009 is $250,000 ($285,000 for qualified enterprise zone and renewal community property). This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $800,000. See Dollar Limits under How Much Can You Deduct in chapter 2.

Depreciation limits on business vehicles. The total section 179 deduction and depreciation you can deduct for a passenger automobile (that is not a truck or van) you use in your business and first placed in service in 2009 is $2,960, if the special depreciation allowance does not apply. The maximum deduction you can take for a truck or van you use in your business and first placed in service in 2009 is $3,060, if the special depreciation allowance does not apply. See Maximum Depreciation Deduction in chapter 5.

Election to accelerate certain credits in lieu of the special depreciation allowance. Generally, a corporation that did not make a section 168(k)(4) election for its first tax year after March 31, 2008, may elect to claim pre-2006 unused research and minimum tax credits in lieu of claiming the special depreciation allowance for extension property placed in service before January 1, 2010. In addition, corporations that made the section 168(k)(4) election can elect to not apply section 168(k)(4) to extension property.

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This publication explains how you can recover the cost of business or income-producing property through deductions for depreciation (for example, the special depreciation allowance and deductions under the Modified Accelerated Cost Recovery System (MACRS)). It also explains how you can elect to take a section 179 deduction, instead of depreciation deductions, for certain property, and the additional rules for listed property.

CAUTION:The depreciation methods discussed in this publication generally do not apply to property placed in service before 1987. For more information, see Publication 534, Depreciating Property Placed in Service Before 1987.

Definitions. Many of the terms used in this publication are defined in the Glossary near the end of the publication. Glossary terms used in each discussion under the major headings are listed before the beginning of each discussion throughout the publication.

Do you need a different publication? The following table shows where you can get more detailed information when depreciating certain types of property.

 _________________________________________________________
 For information              See Publication:
 on depreciating:
 _________________________________________________________
 A car               463, Travel, Entertainment, Gift, and
                     Car Expenses
 _________________________________________________________
 Residential rental  527, Residential Rental Property
 property            (Including Rental of Vacation Home)
 _________________________________________________________
 Office space in     587, Business Use of Your Home
 your home           (Including Use by Daycare Providers)
 _________________________________________________________
 Farm property       225, Farmer's Tax Guide
 _________________________________________________________

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Internal Revenue Service
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Tax questions. If you have a tax question, visit www.irs.gov or call 1-800-829-1040. We cannot answer tax questions sent to either of the addresses listed above.
Introduction

Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. It is an allowance for the wear and tear, deterioration, or obsolescence of the property.

This chapter discusses the general rules for depreciating property and answers the following questions.

• What property can be depreciated?
• What property cannot be depreciated?
• When does depreciation begin and end?
• What method can you use to depreciate your property?
• What is the basis of your depreciable property?
• How do you treat repairs and improvements?
• Do you have to file Form 4562?
• How do you correct depreciation deductions?

Useful Items

You may want to see:

Publication

• 534 Depreciating Property Placed in Service Before 1987
• 535 Business Expenses
• 538 Accounting Periods and Methods
• 551 Basis of Assets

Form (and Instructions)

• Sch C (Form 1040) Profit or Loss From Business
• Sch C-EZ (Form 1040) Net Profit From Business
• 2106 Employee Business Expenses
• 2106-EZ Unreimbursed Employee Business Expenses
• 3115 Application for Change in Accounting Method
• 4562 Depreciation and Amortization

See chapter 6 for information about getting publications and forms.

What Property Can Be Depreciated?

Terms you may need to know (see Glossary):

• Adjusted basis
• Basis
• Commuting
• Disposition
• Fair market value
• Intangible property
• Listed property
• Placed in service
• Tangible property
• Term interest
• Useful life

You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. You also can depreciate certain intangible property, such as patents, copyrights, and computer software.

To be depreciable, the property must meet all the following requirements.

• It must be property you own.
• It must be used in your business or income-producing activity.
• It must have a determinable useful life.
• It must be expected to last more than one year.

The following discussions provide information about these requirements.

Property You Own

To claim depreciation, you usually must be the owner of the property. You are considered as owning property even if it is subject to a debt.

Example 1. You made a down payment to purchase rental property and assumed the previous owner's mortgage. You own the property and you can depreciate it.

Example 2. You bought a new van that you will use only for your courier business. You will be making payments on the van over the next 5 years. You own the van and you can depreciate it.

Leased property. You can depreciate leased property only if you retain the incidents of ownership in the property (explained below). This means you bear the burden of exhaustion of the capital investment in the property. Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. You can, however, depreciate any capital improvements you make to the property. See How Do You Treat Repairs and Improvements later in this chapter and Additions and Improvements under Which Recovery Period Applies in chapter 4.

If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. However, if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased, you cannot depreciate the cost of the property.

Incidents of ownership. Incidents of ownership in property include the following.

• The legal title to the property.
• The legal obligation to pay for the property.
• The responsibility to pay maintenance and operating expenses.
• The duty to pay any taxes on the property.
• The risk of loss if the property is destroyed, condemned, or diminished in value through obsolescence or exhaustion.

Life tenant. Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. However, see Certain term interests in property under Excepted Property, later.

Cooperative apartments. If you are a tenant-stockholder in a cooperative housing corporation and use your cooperative apartment in your business or for the production of income, you can depreciate your stock in the corporation, even though the corporation owns the apartment.

Figure your depreciation deduction as follows.

1. Figure the depreciation for all the depreciable real property owned by the corporation in which you have a proprietary lease or right of tenancy. If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows.

a. Multiply your cost per share by the total number of outstanding shares, including any shares held by the corporation.

b. Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock.

c. Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land.

2. Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders.

3. Divide the number of your shares of stock by the total number of outstanding shares, including any shares held by the corporation.

4. Multiply the result of (2) by the percentage you figured in (3). This is your depreciation on the stock.

Your depreciation deduction for the year cannot be more than the part of your adjusted basis in the stock of the corporation that is allocable to your business or income-producing property. You must also reduce your depreciation deduction if only a portion of the property is used in a business or for the production of income.

Example. You figure your share of the cooperative housing corporation's depreciation to be $30,000. Your adjusted basis in the stock of the corporation is $50,000. You use one half of your apartment solely for business purposes. Your depreciation deduction for the stock for the year cannot be more than $25,000 (1/2 of $50,000).

Change to business use. If you change your cooperative apartment to business use, figure your allowable depreciation as explained earlier. The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts.

• The fair market value of the property on the date you change your apartment to business use. This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic.
• The corporation's adjusted basis in the property on that date. Do not subtract depreciation when figuring the corporation's adjusted basis.

If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1), above. The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic.

For a discussion of fair market value and adjusted basis, see Publication 551.

Property Used in Your Business or Income-Producing Activity

To claim depreciation on property, you must use it in your business or income-producing activity. If you use property to produce income (investment use), the income must be taxable. You cannot depreciate property that you use solely for personal activities.

Partial business or investment use. If you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the business or investment use. For example, you cannot deduct depreciation on a car used only for commuting, personal shopping trips, family vacations, driving children to and from school, or similar activities.

RECORDS: You must keep records showing the business, investment, and personal use of your property. For more information on the records you must keep for listed property, such as a car, see What Records Must Be Kept in chapter 5.

CAUTION:Although you can combine business and investment use of property when figuring depreciation deductions, do not treat investment use as qualified business use when determining whether the business-use requirement for listed property is met. For information about qualified business use of listed property, see What Is the Business-Use Requirement in chapter 5.

Office in the home. If you use part of your home as an office, you may be able to deduct depreciation on that part based on its business use. For information about depreciating your home office, see Publication 587.

Inventory. You cannot depreciate inventory because it is not held for use in your business. Inventory is any property you hold primarily for sale to customers in the ordinary course of your business.

If you are a rent-to-own dealer, you may be able to treat certain property held in your business as depreciable property rather than as inventory. See Rent-to-own dealer under Which Property Class Applies Under GDS in chapter 4.

In some cases, it is not clear whether property is held for sale (inventory) or for use in your business. If it is unclear, examine carefully all the facts in the operation of the particular business. The following example shows how a careful examination of the facts in two similar situations results in different conclusions.

Example. Maple Corporation is in the business of leasing cars. At the end of their useful lives, when the cars are no longer profitable to lease, Maple sells them. Maple does not have a showroom, used car lot, or individuals to sell the cars. Instead, it sells them through wholesalers or by similar arrangements in which a dealer's profit is not intended or considered. Maple can depreciate the leased cars because the cars are not held primarily for sale to customers in the ordinary course of business, but are leased.

If Maple buys cars at wholesale prices, leases them for a short time, and then sells them at retail prices or in sales in which a dealer's profit is intended, the cars are treated as inventory and are not depreciable property. In this situation, the cars are held primarily for sale to customers in the ordinary course of business.

Containers. Generally, containers for the products you sell are part of inventory and you cannot depreciate them. However, you can depreciate containers used to ship your products if they have a life longer than one year and meet the following requirements.

• They qualify as property used in your business.
• Title to the containers does not pass to the buyer.

To determine if these requirements are met, consider the following questions.

• Does your sales contract, sales invoice, or other type of order acknowledgment indicate whether you have retained title?
• Does your invoice treat the containers as separate items?
• Do any of your records state your basis in the containers?

Property Having a Determinable Useful Life

To be depreciable, your property must have a determinable useful life. This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes.

Property Lasting More Than One Year

To be depreciable, property must have a useful life that extends substantially beyond the year you place it in service.

Example. You maintain a library for use in your profession. You can depreciate it. However, if you buy technical books, journals, or information services for use in your business that have a useful life of one year or less, you cannot depreciate them. Instead, you deduct their cost as a business expense.

What Property Cannot Be Depreciated?

Terms you may need to know (see Glossary):

• Amortization
• Basis
• Goodwill
• Intangible property
• Remainder interest
• Term interest

Certain property cannot be depreciated. This includes land and certain excepted property.

Land

You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up. The cost of land generally includes the cost of clearing, grading, planting, and landscaping.

Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property.

Example. You constructed a new building for use in your business and paid for grading, clearing, seeding, and planting bushes and trees. Some of the bushes and trees were planted right next to the building, while others were planted around the outer border of the lot. If you replace the building, you would have to destroy the bushes and trees right next to it. These bushes and trees are closely associated with the building, so they have a determinable useful life. Therefore, you can depreciate them. Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them.

Excepted Property

Even if the requirements explained in the preceding discussions are met, you cannot depreciate the following property.

• Property placed in service and disposed of in the same year. Determining when property is placed in service is explained later.
• Equipment used to build capital improvements. You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. See Uniform Capitalization Rules in Publication 551.
• Section 197 intangibles. You must amortize these costs. Section 197 intangibles are discussed in detail in Chapter 8 of Publication 535. Intangible property, such as certain computer software, that is not section 197 intangible property, can be depreciated if it meets certain requirements. See Intangible Property on page 9.
• Certain term interests.

Certain term interests in property. You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. A term interest in property means a life interest in property, an interest in property for a term of years, or an income interest in a trust.

Related persons. For a description of related persons, see Related persons on page 8. For this purpose, however, treat as related persons only the relationships listed in items (1) through (10) of that discussion and substitute "50%" for "10%" each place it appears.

Basis adjustments. If you would be allowed a depreciation deduction for a term interest in property except that the holder of the remainder interest is related to you, you generally must reduce your basis in the term interest by any depreciation or amortization not allowed.

If you hold the remainder interest, you generally must increase your basis in that interest by the depreciation not allowed to the term interest holder. However, do not increase your basis for depreciation not allowed for periods during which either of the following situations applies.

• The term interest is held by an organization exempt from tax.
• The term interest is held by a nonresident alien individual or foreign corporation, and the income from the term interest is not effectively connected with the conduct of a trade or business in the United States.

Exceptions. The above rules do not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. They also do not apply to the holder of dividend rights that were separated from any stripped preferred stock if the rights were purchased after April 30, 1993, or to a person whose basis in the stock is determined by reference to the basis in the hands of the purchaser.

When Does Depreciation Begin and End?

Terms you may need to know (see Glossary):

• Basis
• Exchange
• Placed in service

You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first.

Placed in Service

You place property in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Even if you are not using the property, it is in service when it is ready and available for its specific 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.

Conversion to business use. If you place property in service in a personal activity, you cannot claim depreciation. However, if you change the property's use to use in a business or income-producing activity, then you can begin to depreciate it at the time of the change. You place the property in service on the date of the change.

Example. You bought a home and used it as your personal home several years before you converted it to rental property. Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. You can begin to claim depreciation in the year you converted it to rental property because its use changed to an income-producing use at that time.

Idle Property

Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle (not in use). For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine.

Cost or Other Basis Fully Recovered

You stop depreciating property when you have fully recovered your cost or other basis. You recover your basis when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. See What Is the Basis of Your Depreciable Property, later.

Retired From Service

You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events.

• You sell or exchange the property.
• You convert the property to personal use.
• You abandon the property.
• You transfer the property to a supplies or scrap account.
• The property is destroyed.

What Method Can You Use To Depreciate Your Property?

Terms you may need to know (see Glossary):

• Adjusted basis
• Basis
• Convention
• Exchange
• Fiduciary
• Grantor
• Intangible property
• Nonresidential real property
• Placed in service
• Related persons
• Residential rental property
• Salvage value
• Section 1245 property
• Section 1250 property
• Standard mileage rate
• Straight line method
• Unit-of-production method
• Useful life

You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most property. MACRS is discussed in chapter 4.

You cannot use MACRS to depreciate the following property.

• Property you placed in service before 1987.
• Certain property owned or used in 1986.
• Intangible property.
• Films, video tapes, and recordings.
• Certain corporate or partnership property acquired in a nontaxable transfer.
• Property you elected to exclude from MACRS.

The following discussions describe the property listed above and explain what depreciation method should be used.

Property You Placed in Service Before 1987

You cannot use MACRS for property you placed in service before 1987 (except property you placed in service after July 31, 1986, if MACRS was elected). Property placed in service before 1987 must be depreciated under the methods discussed in Publication 534.

For a discussion of when property is placed in service, see When Does Depreciation Begin and End, earlier.

Use of real property changed. You generally must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986.

Improvements made after 1986. You must treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. Therefore, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. For more information about improvements, see How Do You Treat Repairs and Improvements, later and Additions and Improvements under Which Recovery Period Applies in chapter 4.

Property Owned or Used in 1986

You may not be able to use MACRS for property you acquired and placed in service after 1986 if any of the situations described below apply. If you cannot use MACRS, the property must be depreciated under the methods discussed in Publication 534.

CAUTION:For the following discussions, do not treat property as owned before you placed it in service. If you owned property in 1986 but did not place it in service until 1987, you do not treat it as owned in 1986.

Personal property. You cannot use MACRS for personal property (section 1245 property) in any of the following situations.

1. You or someone related to you owned or used the property in 1986.

2. You acquired the property from a person who owned it in 1986 and as part of the transaction the user of the property did not change.

3. You lease the property to a person (or someone related to this person) who owned or used the property in 1986.

4. You acquired the property in a transaction in which:

a. The user of the property did not change, and

b. The property was not MACRS property in the hands of the person from whom you acquired it because of (2) or (3) above.

Real property. You generally cannot use MACRS for real property (section 1250 property) in any of the following situations.

• You or someone related to you owned the property in 1986.
• You lease the property to a person who owned the property in 1986 (or someone related to that person).
• You acquired the property in a like-kind exchange, involuntary conversion, or repossession of property you or someone related to you owned in 1986. MACRS applies only to that part of your basis in the acquired property that represents cash paid or unlike property given up. It does not apply to the carried-over part of the basis.

Exceptions. The rules above do not apply to the following.

1. Residential rental property or nonresidential real property.

2. Any property if, in the first tax year it is placed in service, the deduction under the Accelerated Cost Recovery System (ACRS) is more than the deduction under MACRS using the half-year convention. For information on how to figure depreciation under ACRS, see Publication 534.

3. Property that was MACRS property in the hands of the person from whom you acquired it because of (2) above.

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

1. 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.

2. A corporation and an individual who directly or indirectly owns more than 10% of the value of the outstanding stock of that corporation.

3. Two corporations that are members of the same controlled group.

4. A trust fiduciary and a corporation if more than 10% of the value of the outstanding stock is directly or indirectly owned by or for the trust or grantor of the trust.

5. The grantor and fiduciary, and the fiduciary and beneficiary, of any trust.

6. 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.

7. A tax-exempt educational or charitable organization and any person (or, if that person is an individual, a member of that person's family) who directly or indirectly controls the organization.

8. Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 10% of the value of the outstanding stock of each corporation.

9. A corporation and a partnership if the same persons own both of the following.

a. More than 10% of the value of the outstanding stock of the corporation.

b. More than 10% of the capital or profits interest in the partnership.

10. The executor and beneficiary of any estate.

11. A partnership and a person who directly or indirectly owns more than 10% of the capital or profits interest in the partnership.

12. Two partnerships, if the same persons directly or indirectly own more than 10% of the capital or profits interest in each.

13. The related person and a person who is engaged in trades or businesses under common control. See section 52(a) and 52(b) of the Internal Revenue Code.

When to determine relationship. You must determine whether you are related to another person at the time you acquire the property.

A partnership acquiring property from a terminating partnership must determine whether it is related to the terminating partnership immediately before the event causing the termination. For this rule, a terminating partnership is one that sells or exchanges, within 12 months, 50% or more of its total interest in partnership capital or profits.

Constructive ownership of stock or partnership interest. To determine whether a person directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership, apply the following rules.

1. Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more of the value of the stock of the corporation.

2. An individual is considered to own the stock or partnership interest directly or indirectly owned by or for the individual's family.

3. An individual who owns, except by applying rule (2), any stock in a corporation is considered to own the stock directly or indirectly owned by or for the individual's partner.

4. For purposes of rules (1), (2), or (3), stock or a partnership interest considered to be owned by a person under rule (1) is treated as actually owned by that person. However, stock or a partnership interest considered to be owned by an individual under rule (2) or (3) is not treated as owned by that individual for reapplying either rule (2) or (3) to make another person considered to be the owner of the same stock or partnership interest.

Intangible Property

Generally, if you can depreciate intangible property, you usually use the straight line method of depreciation. However, you can choose to depreciate certain intangible property under the income forecast method (discussed later).

CAUTION:You cannot depreciate intangible property that is a section 197 intangible or that otherwise does not meet all the requirements discussed earlier under What Property Can Be Depreciated.

Straight Line Method

This method lets you deduct the same amount of depreciation each year over the useful life of the property. To figure your deduction, first determine the adjusted basis, salvage value, and estimated useful life of your property. Subtract the salvage value, if any, from the adjusted basis. The balance is the total depreciation you can take over the useful life of the property.

Divide the balance by the number of years in the useful life. This gives you your yearly depreciation deduction. Unless there is a big change in adjusted basis or useful life, this amount will stay the same throughout the time you depreciate the property. If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use.

Example. In April, Frank bought a patent for $5,100 that is not a section 197 intangible. He depreciates the patent under the straight line method, using a 17-year useful life and no salvage value. He divides the $5,100 basis by 17 years to get his $300 yearly depreciation deduction. He only used the patent for 9 months during the first year, so he multiplies $300 by 9/12 to get his deduction of $225 for the first year. Next year, Frank can deduct $300 for the full year.

Patents and copyrights. If you can depreciate the cost of a patent or copyright, use the straight line method over the useful life. The useful life of a patent or copyright is the lesser of the life granted to it by the government or the remaining life when you acquire it. However, if the patent or copyright becomes valueless before the end of its useful life, you can deduct in that year any of its remaining cost or other basis.

Computer software. Computer software is a section 197 intangible and cannot be depreciated if you acquired it in connection with the acquisition of assets constituting a business or a substantial part of a business.

However, computer software is not a section 197 intangible and can be depreciated, even if acquired in connection with the acquisition of a business, if it meets all of the following tests.

• It is readily available for purchase by the general public.
• It is subject to a nonexclusive license.
• It has not been substantially modified.

If the software meets the tests above, it may also qualify for the section 179 deduction and the special depreciation allowance, discussed later. If you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months.

Tax-exempt use property subject to a lease. The useful life of computer software leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership), cannot be less than 125% of the lease term.

Certain created intangibles. You can amortize certain intangibles created on or after December 30, 2003, over a 15-year period using the straight line method and no salvage value, even though they have a useful life that cannot be estimated with reasonable accuracy. For example, amounts paid to acquire memberships or privileges of indefinite duration, such as a trade association membership, are eligible costs.

The following are not eligible.

• Any intangible asset acquired from another person.
• Created financial interests.
• Any intangible asset that has a useful life that can be estimated with reasonable accuracy.
• Any intangible asset that has an amortization period or limited useful life that is specifically prescribed or prohibited by the Code, regulations, or other published IRS guidance.
• Any amount paid to facilitate an acquisition of a trade or business, a change in the capital structure of a business entity, and certain other transactions.

You must also increase the 15-year safe harbor amortization period to a 25-year period for certain intangibles related to benefits arising from the provision, production, or improvement of real property. For this purpose, real property includes property that will remain attached to the real property for an indefinite period of time, such as roads, bridges, tunnels, pavements, and pollution control facilities.

Income Forecast Method

You can choose to use the income forecast method instead of the straight line method to depreciate the following depreciable intangibles.

• Motion picture films or video tapes.
• Sound recordings.
• Copyrights.
• Books.
• Patents.

Under the income forecast method, each year's depreciation deduction is equal to the cost, of the property, multiplied by a fraction. The numerator of the fraction is the current year's net income from the property, and the denominator is the total income anticipated from the property through the end of the 10th taxable year following the taxable year the property is placed in service. For more information, see section 167(g) of the Internal Revenue Code.

Creating or acquiring musical compositions or copyrights to musical compositions. You can elect to amortize all applicable expenses paid or incurred in the current year in creating or acquiring musical compositions or copyrights to musical compositions placed in service during the tax year instead of using the income forecast method. If you make the election, amortize the expenses ratably over a 5-year period beginning with the month the property is placed in service. This election does not apply to the following.

1. Expenses that are qualified creative expenses under section 263A(h),

2. Property to which a simplified procedure established under section 263A(i)(2) applies,

3. Property that is an amortizable section 197 intangible, or

4. Expenses that would not be allowable as a deduction.

For more information, see section 167(g)(8) of the Internal Revenue Code.

Films, video tapes, and recordings. You cannot use MACRS for motion picture films, video tapes, and sound recordings. For this purpose, sound recordings are discs, tapes, or other phonorecordings resulting from the fixation of a series of sounds. You can depreciate this property using either the straight line method or the income forecast method.

Participations and residuals. You can include participations and residuals in the adjusted basis of the property for purposes of computing your depreciation deduction under the income forecast method. The participations and residuals must relate to income to be derived from the property before the end of the 10th taxable year after the property is placed in service. For this purpose, participations and residuals are defined as costs which by contract vary with the amount of income earned in connection with the property.

Instead of including these amounts in the adjusted basis of the property, you can deduct the costs in the taxable year that they are paid.

Videocassettes. If you are in the business of renting videocassettes, you can depreciate only those videocassettes bought for rental. If the videocassette has a useful life of one year or less, you can currently deduct the cost as a business expense.

Corporate or Partnership Property Acquired in a Nontaxable Transfer

MACRS does not apply to property used before 1987 and transferred after 1986 to a corporation or partnership (except property the transferor placed in service after July 31, 1986, if MACRS was elected) to the extent its basis is carried over from the property's adjusted basis in the transferor's hands. You must continue to use the same depreciation method as the transferor and figure depreciation as if the transfer had not occurred. However, if MACRS would otherwise apply, you can use it to depreciate the part of the property's basis that exceeds the carried-over basis.

The nontaxable transfers covered by this rule include the following.

• A distribution in complete liquidation of a subsidiary.
• A transfer to a corporation controlled by the transferor.
• An exchange of property solely for corporate stock or securities in a reorganization.
• A contribution of property to a partnership in exchange for a partnership interest.
• A partnership distribution of property to a partner.

Election To Exclude Property From MACRS

If you can properly depreciate any property under a method not based on a term of years, such as the unit-of-production method, you can elect to exclude that property from MACRS. You make the election by reporting your depreciation for the property on line 15 in Part II of Form 4562 and attaching a statement as described in the instructions for Form 4562. You must make this election by the return due date (including extensions) for the tax year you place your 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.

Use of standard mileage rate. If you use the standard mileage rate to figure your tax deduction for your business automobile, you are treated as having made an election to exclude the automobile from MACRS. See Publication 463 for a discussion of the standard mileage rate.

What Is the Basis of Your Depreciable Property?

Terms you may need to know (see Glossary):

• Abstract fees
• Adjusted basis
• Basis
• Exchange
• Fair market value

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.

Cost as Basis

The basis of property you buy is its cost plus amounts you paid for items such as sales tax (see Exception, below), freight charges, and installation and testing fees. The cost includes the amount you pay in cash, debt obligations, other property, or services.

Exception. You can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). If you make that choice, you cannot include those sales taxes as part of your cost basis.

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 pay for the property plus the amount of the assumed debt.

Example. You make a $20,000 down payment on 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 costs. The basis of real property also includes certain fees and charges you pay in addition to the purchase price. These generally are shown on your settlement statement and include the following.

• Legal and recording fees.
• Abstract fees.
• Survey charges.
• Owner's title insurance.
• Amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.

For fees and charges you cannot include in the basis of property, see Real Property in Publication 551.

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 and the regulations under section 263A of the Internal Revenue Code.

Other Basis

Other basis usually refers to basis that is determined by the way you received the property. For example, your basis is other than cost if you acquired the property in exchange for other property, as payment for services you performed, as a gift, or as an inheritance. If you acquired property in this or some other way, see Publication 551 to determine your basis.

Property changed from personal use. If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of the following.

1. The fair market value (FMV) of the property on the date of the change in use.

2. Your original cost or other basis adjusted as follows.

a. Increased by the cost of any permanent improvements or additions and other costs that must be added to basis.

b. Decreased by any 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 $25,000. 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. Land is not depreciable, so she includes only the cost of the house when figuring the basis for depreciation.

Nia's adjusted basis in the house when she changed its use was $178,000 ($160,000 + $20,000 - $2,000). On the same date, her property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. The basis for depreciation on the house is the FMV on the date of change ($165,000), because it is less than her adjusted basis ($178,000).

Property acquired in a nontaxable transaction. Generally, if you receive property in a nontaxable exchange, the basis of the property you receive is the same as the adjusted basis of the property you gave up. Special rules apply in determining the basis and figuring the MACRS depreciation deduction and special depreciation allowance for property acquired in a like-kind exchange or involuntary conversion. See Like-kind exchanges and involuntary conversions under How Much Can You Deduct in chapter 3 and Figuring the Deduction for Property Acquired in a Nontaxable Exchange in chapter 4.

There are also special rules for determining the basis of MACRS property involved in a like-kind exchange or involuntary conversion when the property is contained in a general asset account. See How Do You Use General Asset Accounts in chapter 4.

Adjusted Basis

To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the 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.
• Paying legal fees for perfecting the title.
• Settling zoning issues.
• Receiving rebates.
• Incurring a casualty or theft loss.

For a discussion of adjustments to the basis of your property, see Adjusted Basis in Publication 551.

If you depreciate your property under MACRS, you also may have to reduce your basis by certain deductions and credits with respect to the property. For more information, see What Is the Basis For Depreciation in chapter 4.

Basis adjustment for depreciation allowed or allowable. You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Depreciation allowable is depreciation you are entitled to deduct.

If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable.

If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed).

How Do You Treat Repairs and Improvements?

If you improve depreciable property, you must treat the improvement as separate depreciable property. Improvement means an addition to or partial replacement of property that adds to its value, appreciably lengthens the time you can use it, or adapts it to a different use.

You generally deduct the cost of repairing business property in the same way as any other business expense. However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it.

Example. You repair a small section on one corner of the roof of a rental house. You deduct the cost of the repair as a rental expense. However, if you completely replace the roof, the new roof is an improvement because it increases the value and lengthens the life of the property. You depreciate the cost of the new roof.

Improvements to rented property. You can depreciate permanent improvements you make to business property you rent from someone else.

Do You Have To File Form 4562?

Terms you may need to know (see Glossary):

• Amortization
• Listed property
• Placed in service
• Standard mileage rate

Use Form 4562 to figure your deduction for depreciation and amortization. Attach Form 4562 to your tax return for the current tax year if you are claiming any of the following items.

• A section 179 deduction for the current year or a section 179 carryover from a prior year. See chapter 2 for information on the section 179 deduction.
• Depreciation for property placed in service during the current year.
• Depreciation on any vehicle or other listed property, regardless of when it was placed in service. See chapter 5 for information on listed property.
• A deduction for any vehicle if the deduction is reported on a form other than Schedule C (Form 1040) or Schedule C-EZ (Form 1040).
• Amortization of costs if the current year is the first year of the amortization period.
• Depreciation or amortization on any asset on a corporate income tax return (other than Form 1120S, U.S. Income Tax Return for an S Corporation) regardless of when it was placed in service.

  CAUTION: You must submit a separate Form 4562 for each business or activity on your return for which a Form 4562 is required.

Table 1-1 presents an overview of the purpose of the various parts of Form 4562.

Table 1-1. Purpose of Form 4562

 This table describes the purpose of the various parts of Form 4562.
 For more information, see Form 4562 and its instructions.
 ______________________________________________________________________
 Part                              Purpose
 ______________________________________________________________________
   I   o Electing the section 179 deduction
       o Figuring the maximum section 179 deduction for the current
       year
       o Figuring any section 179 deduction carryover to the next year
 ______________________________________________________________________
  II   o Reporting the special depreciation allowance for property
       (other than listed property) placed in service during the tax
       year
       o Reporting depreciation deductions on property being
       depreciated under any method other than Modified Accelerated
       Cost Recovery System (MACRS)
 ______________________________________________________________________
  III  o Reporting MACRS depreciation deductions for property placed in
       service before this year
       o Reporting MACRS depreciation deductions for property (other
       than listed property) placed in service during the current year
 ______________________________________________________________________
  IV   o Summarizing other parts
 ______________________________________________________________________
   V   o Reporting the special depreciation allowance for automobiles
       and other listed property
       o Reporting MACRS depreciation on automobiles and other listed
       property
       o Reporting the section 179 cost elected for automobiles and
       other listed property
       o Reporting information on the use of automobiles and other
       transportation vehicles
 ______________________________________________________________________
  VI   o Reporting amortization deductions
 ______________________________________________________________________

Employee. Do not use Form 4562 if you are an employee and you deduct job-related vehicle expenses using either actual expenses (including depreciation) or the standard mileage rate. Instead, use either Form 2106 or Form 2106-EZ. Use Form 2106-EZ if you are claiming the standard mileage rate and you are not reimbursed by your employer for any expenses.

How Do You Correct Depreciation Deductions?

If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. See Filing an Amended Return, next. If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. See Changing Your Accounting Method, later.

Filing an Amended Return

You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations.

• You claimed the incorrect amount because of a mathematical error made in any year.
• You claimed the incorrect amount because of a posting error made in any year.
• You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003.
• You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003.

Adoption of accounting method defined. Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return, or by using the same impermissible method of determining depreciation in two or more consecutively filed tax returns. For an exception to this 2-year rule, see Revenue Procedure 2008-52, on page 587 of Internal Revenue Bulletin 2008-36, available at www.irs.gov/pub/irs-irbs/irb08-36.pdf, as modified by Revenue Procedure 2009-39 on page 371 of Internal Revenue Bulletin 2009-38, available at www.irs.gov/pub/irs-irbs/irb09-38.pdf. For a safe harbor method of accounting to treat rotable spare parts as depreciable assets and procedures to obtain automatic consent to change to the safe harbor method of accounting, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www.irs.gov/pub/irs-irbs/irb07-29.pdf.

When to file. If an amended return is allowed, you must file it by the later of the following.

• 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. A return filed before an unextended due date is considered filed on that due date.
• 2 years from the time you paid your tax for that year.

Changing Your Accounting Method

Generally, you must get IRS approval to change your method of accounting. You generally must file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation.

The following are examples of a change in method of accounting for depreciation.

• A change from an impermissible method of determining depreciation for depreciable property, if the impermissible method was used in two or more consecutively filed tax returns.
• A change in the treatment of an asset from nondepreciable to depreciable or vice versa.
• A change in the depreciation method, period of recovery, or convention of a depreciable asset.
• A change from not claiming to claiming the special depreciation allowance if you did not make the election to not claim any special allowance.
• A change from claiming a 50% special depreciation allowance to claiming a 30% special depreciation allowance for qualified property (including property that is included in a class of property for which you elected a 30% special allowance instead of a 50% special allowance).

Changes in depreciation that are not a change in method of accounting (and may only be made on an amended return) include the following.

• An adjustment in the useful life of a depreciable asset for which depreciation is determined under section 167.
• A change in use of an asset in the hands of the same taxpayer.
• Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct the special depreciation allowance). If you elected not to claim any special allowance, a change from not claiming to claiming the special allowance is a revocation of the election and is not an accounting method change. Generally, you must get IRS approval to make a late depreciation election or revoke a depreciation election. You must submit a request for a letter ruling to make a late election or revoke an election.
• Any change in the placed in service date of a depreciable asset.

See section 1.446-1(e)(2)(ii)(d) of the regulations for more information and examples.

IRS approval. In some instances, you may be able to get approval from the IRS to change your method of accounting for depreciation under the automatic change request procedures generally covered in Revenue Procedure 2008-52. If you do not qualify to use the automatic procedures to get approval, you must use the advance consent request procedures generally covered in Revenue Procedure 97-27, 1997-1 C.B. 680. Also see the Instructions for Form 3115 for more information on getting approval, including lists of scope limitations and automatic accounting method changes.

Additional guidance. For additional guidance and special procedures for changing your accounting method, automatic change procedures, amending your return, and filing Form 3115, see Revenue Procedure 2008-52, on page 587 of Internal Revenue Bulletin 2008-36, available at www.irs.gov/pub/irs-irbs/irb08-36.pdf, as modified by Revenue Procedure 2009-39 on page 371 of Internal Revenue Bulletin 2009-39, available at www.irs.gov/pub/irs-irbs/irb09-39.pdf.

For a safe harbor method of accounting to treat rotable spare parts as depreciable assets, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www.irs.gov/pub/irs-irbs/irb07-29.pdf.

Section 481(a) adjustment. If you file Form 3115 and change from an impermissible method to a permissible method of accounting for depreciation, you can make a section 481(a) adjustment for any unclaimed or excess amount of allowable depreciation. The adjustment is the difference between the total depreciation actually deducted for the property and the total amount allowable prior to the year of change. If no depreciation was deducted, the adjustment is the total depreciation allowable prior to the year of change. A negative section 481(a) adjustment results in a decrease in taxable income. It is taken into account in the year of change and is reported on your business tax returns as "other expenses." A positive section 481(a) adjustment results in an increase in taxable income. It is generally taken into account over 4 tax years and is reported on your business tax returns as "other income." However, you can elect to use a one-year adjustment period and report the adjustment in the year of change if the total adjustment is less than $25,000. Make the election by completing the appropriate line on Form 3115.

If you file a Form 3115 and change from one permissible method to another permissible method, the section 481(a) adjustment is zero.

Introduction

You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. This is the section 179 deduction. You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions.

CAUTION:Estates and trusts cannot elect the section 179 deduction.

This chapter explains what property does and does not qualify for the section 179 deduction, what limits apply to the deduction (including special rules for partnerships and corporations), and how to elect it. It also explains when and how to recapture the deduction.

Useful Items

You may want to see:

Publication

• 537 Installment Sales
• 544 Sales and Other Dispositions of Assets
• 954 Tax Incentives for Distressed Communities

Form (and Instructions)

• 4562 Depreciation and Amortization
• 4797 Sales of Business Property

See chapter 6 for information about getting publications and forms.

What Property Qualifies?

Terms you may need to know (see Glossary):

• Adjusted basis
• Basis
• Class life
• Structural components
• Tangible property

To qualify for the section 179 deduction, your property must meet all the following requirements.

• It must be eligible property.
• It must be acquired for business use.
• It must have been acquired by purchase.
• It must not be property described later under What Property Does Not Qualify.

The following discussions provide information about these requirements and exceptions.

Eligible Property

To qualify for the section 179 deduction, your property must be one of the following types of depreciable property.

1. Tangible personal property.

2. Other tangible property (except buildings and their structural components) used as:

a. An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services,

b. A research facility used in connection with any of the activities in (a) above, or

c. A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities.

3. Single purpose agricultural (livestock) or horticultural structures. See chapter 7 of Publication 225 for definitions and information regarding the use requirements that apply to these structures.

4. Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.

5. Off-the-shelf computer software.

Tangible personal property. Tangible personal property is any tangible property that is not real property. It includes the following property.

• Machinery and equipment.
• Property contained in or attached to a building (other than structural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs.
• Gasoline storage tanks and pumps at retail service stations.
• Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals.

The treatment of property as tangible personal property for the section 179 deduction is not controlled by its treatment under local law. For example, property may not be tangible personal property for the deduction even if treated so under local law, and some property (such as fixtures) may be tangible personal property for the deduction even if treated as real property under local law.

Off-the-shelf computer software. Off-the-shelf computer software placed in service during the tax year is qualifying property for purposes of the section 179 deduction. This is computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. It includes any program designed to cause a computer to perform a desired function. However, a database or similar item is not considered computer software unless it is in the public domain and is incidental to the operation of otherwise qualifying software.

Property Acquired for Business Use

To qualify for the section 179 deduction, your property must have been acquired for use in your trade or business. Property you acquire only for the production of income, such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify.

Partial business use. When you use property for both business and nonbusiness purposes, you can elect the section 179 deduction only if you use the property more than 50% for business in the year you place it in service. If you use the property more than 50% for business, multiply the cost of the property by the percentage of business use. Use the resulting business cost to figure your section 179 deduction.

Example. May Oak bought and placed in service an item of section 179 property costing $11,000. She used the property 80% for her business and 20% for personal purposes. The business part of the cost of the property is $8,800 (80% x $11,000).

Property Acquired by Purchase

To qualify for the section 179 deduction, your property must have been acquired by purchase. For example, property acquired by gift or inheritance does not qualify.

Property is not considered acquired by purchase in the following situations.

1. It is acquired by one member of a controlled group from another member of the same group.

2. Its basis is determined either --

a. In whole or in part by its adjusted basis in the hands of the person from whom it was acquired, or

b. Under the stepped-up basis rules for property acquired from a decedent.

3. It is acquired from a related person.

Related persons. Related persons are described under Related persons on page 8. However, to determine whether property qualifies for the section 179 deduction, treat as an individual's family only his or her spouse, ancestors, and lineal descendants and substitute "50%" for "10%" each place it appears.

Example. Ken Larch is a tailor. He bought two industrial sewing machines from his father. He placed both machines in service in the same year he bought them. They do not qualify as section 179 property because Ken and his father are related persons. He cannot claim a section 179 deduction for the cost of these machines.

What Property Does Not Qualify?

Terms you may need to know (see Glossary):

• Basis
• Class life

Certain property does not qualify for the section 179 deduction. This includes the following.

Land and Improvements

Land and land improvements, such as buildings and other permanent structures and their components, are real property, not personal property and do not qualify as section 179 property. Land improvements include swimming pools, paved parking areas, wharves, docks, bridges, and fences.

Excepted Property

Even if the requirements explained earlier under What Property Qualifies are met, you cannot elect the section 179 deduction for the following property.

• Certain property you lease to others (if you are a noncorporate lessor).
• Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging.
• Air conditioning or heating units.
• Property used predominantly outside the United States, except property described in section 168(g)(4) of the Internal Revenue Code.
• Property used by certain tax-exempt organizations, except property used in connection with the production of income subject to the tax on unrelated trade or business income.
• Property used by governmental units or foreign persons or entities, except property used under a lease with a term of less than 6 months.

Leased property. Generally, you cannot claim a section 179 deduction based on the cost of property you lease to someone else. This rule does not apply to corporations. However, you can claim a section 179 deduction for the cost of the following property.

1. Property you manufacture or produce and lease to others.

2. Property you purchase and lease to others if both the following tests are met.

a. The term of the lease (including options to renew) is less than 50% of the property's class life.

b. For the first 12 months after the property is transferred to the lessee, the total business deductions you are allowed on the property (other than rents and reimbursed amounts) are more than 15% of the rental income from the property.

Property used for lodging. Generally, you cannot claim a section 179 deduction for property used predominantly to furnish lodging or in connection with the furnishing of lodging. However, this does not apply to the following types of property.

• Nonlodging commercial facilities that are available to those not using the lodging facilities on the same basis as they are available to those using the lodging facilities.
• Property used by a hotel or motel in connection with the trade or business of furnishing lodging where the predominant portion of the accommodations is used by transients.
• Any certified historic structure to the extent its basis is due to qualified rehabilitation expenditures.
• Any energy property.

Energy property. Energy property is property that meets the following requirements.

1. It is one of the following types of property.

a. Equipment that uses solar energy to generate electricity, to heat or cool a structure, to provide hot water for use in a structure, or to provide solar process heat, except for equipment used to generate energy to heat a swimming pool.

b. Equipment placed in service after December 31, 2005, and before January 1, 2017, that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight.

c. Equipment used to produce, distribute, or use energy derived from a geothermal deposit. For electricity generated by geothermal power, this includes equipment up to (but not including) the electrical transmission stage.

d. Qualified fuel cell property or qualified microturbine property placed in service after December 31, 2005, and before January 1, 2017.

2. The construction, reconstruction, or erection of the property must be completed by you.

3. For property you acquire, the original use of the property must begin with you.

4. The property must meet the performance and quality standards, if any, prescribed by Income Tax Regulations in effect at the time you get the property.

For periods before February 14, 2008, energy property does not include any property that is public utility property as defined by section 46(f)(5) of the Internal Revenue Code (as in effect on November 4, 1990).

How Much Can You Deduct?

Terms you may need to know (see Glossary):

• Adjusted basis
• Basis
• Placed in service

Your section 179 deduction is generally the cost of the qualifying property. However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. These limits apply to each taxpayer, not to each business. However, see Married Individuals under Dollar Limits, later. Also, see the special rules for applying the limits for partnerships and S corporations later. For a passenger automobile, the total section 179 deduction and depreciation deduction are limited. See Do the Passenger Automobile Limits Apply in chapter 5.

If you deduct only part of the cost of qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct.

Trade-in of other property. If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 deduction includes only the cash you paid.

Example. Silver Leaf, a retail bakery, traded two ovens having a total adjusted basis of $680 for a new oven costing $1,320. They received an $800 trade-in allowance for the old ovens and paid $520 in cash for the new oven. The bakery also traded a used van with an adjusted basis of $4,500 for a new van costing $9,000. They received a $4,800 trade-in allowance on the used van and paid $4,200 in cash for the new van.

Only the portion of the new property's basis paid by cash qualifies for the section 179 deduction. Therefore, Silver Leaf's qualifying costs for the section 179 deduction are $4,720 ($520 + $4,200).

Dollar Limits

The total amount you can elect to deduct under section 179 for most property placed in service in 2009 generally cannot be more than $250,000. If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 deduction among the items in any way, as long as the total deduction is not more than $250,000. You do not have to claim the full $250,000.

TIP:The amount you can elect to deduct is not affected if you place qualifying property in service in a short tax year or if you place qualifying property in service for only a part of a 12-month tax year.

CAUTION: After you apply the dollar limit to determine a tentative deduction, you must apply the business income limit (described later) to determine your actual section 179 deduction.

Example. In 2009, you bought and placed in service a $275,000 tractor and a $25,000 circular saw for your business. You elect to deduct $225,000 for the tractor and the entire $25,000 for the saw, a total of $250,000. This is the maximum amount you can deduct. Your $25,000 deduction for the saw completely recovered its cost. Your basis for depreciation is zero. The basis for depreciation of your tractor is $50,000. You figure this by subtracting your $225,000 section 179 deduction for the tractor from the $275,000 cost of the tractor.

Situations affecting dollar limit. Under certain circumstances, the general dollar limits on the section 179 deduction may be reduced or increased or there may be additional dollar limits. The general dollar limit is affected by any of the following situations.

• The cost of your section 179 property placed in service exceeds $800,000.
• Your business is an enterprise zone business or a renewal community business.
• You placed in service a sport utility or certain other vehicles.
• You are married filing a joint or separate return.

  Costs exceeding $800,000

If the cost of your qualifying section 179 property placed in service in a year is more than $800,000, you generally must reduce the dollar limit (but not below zero) by the amount of cost over $800,000. If the cost of your section 179 property placed in service during 2009 is $1,050,000 or more, you cannot take a section 179 deduction.

Example. In 2009 Jane Ash placed in service machinery costing $875,000. This cost is $75,000 more than $800,000, so she must reduce her dollar limit to $175,000 ($250,000 - $75,000).

Enterprise Zone and Renewal Community Businesses

An increased section 179 deduction is available to enterprise zone businesses and renewal community businesses for qualified zone property or qualified renewal property placed in service before January 1, 2010, in an empowerment zone or renewal community. For definitions of "enterprise zone business," "renewal community business," "qualified zone property," and "qualified renewal property," see Publication 954, Tax Incentives for Distressed Communities.

The dollar limit on the section 179 deduction is increased by the smaller of:

• $35,000, or
• The cost of section 179 property that is also qualified zone property or qualified renewal property placed in service before January 1, 2010 (including such property placed in service by your spouse, even if you are filing a separate return).

Note. You take into account only 50% (instead of 100%) of the cost of qualified zone property or qualified renewal property placed in service in a year when figuring the reduced dollar limit for costs exceeding $800,000 (explained earlier).

CAUTION:For purposes of this increased section 179 deduction, do not treat qualified section 179 Disaster Assistance property, defined next, as qualified zone property (or qualified renewal property) unless you elect not to treat the property as qualified section 179 Disaster Assistance property.

Disaster Assistance Property

An increased section 179 deduction is available for qualified section 179 Disaster Assistance property placed in service in a federally declared disaster area in which the disaster occurred before January 1, 2010. A list of the federally declared disaster areas is available at the Federal Emergency Management Agency (FEMA) website at www.fema.gov.

Qualified section 179 Disaster Assistance property. Qualified section 179 Disaster Assistance property is section 179 property (described earlier) placed in service December 31, 2007 that is also qualified Disaster Assistance property. See Qualified Disaster Assistance Property in chapter 3 for a description of qualified Disaster Assistance property.

Dollar limits. The dollar limit on the section 179 deduction is increased by the smaller of:

• $100,000, or
• The cost of qualified section 179 Disaster Assistance property placed in service during the tax year.

The amount for which you can make an election is reduced if the cost of all section 179 property placed in service during the 2009 tax year exceeds $800,000, increased by the smaller of:

• $600,000, or
• The cost of qualified section 179 Disaster Assistance property placed in service during the tax year.

  Sport Utility and Certain Other Vehicles

You cannot elect to expense more than $25,000 of the cost of any heavy sport utility vehicle (SUV) and certain other vehicles placed in service during the tax year. This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. However, the $25,000 limit does not apply to any vehicle:

• Designed to seat more than nine passengers behind the driver's seat,
• Equipped with a cargo area (either open or enclosed by a cap) of at least six feet in interior length that is not readily accessible from the passenger compartment, or
• That has an integral enclosure fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

  Married Individuals

If you are married, how you figure your section 179 deduction depends on whether you file jointly or separately. If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $800,000. You must allocate the dollar limit (after any reduction) between you equally, unless you both elect a different allocation. If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you.

Example. Jack Elm is married. He and his wife file separate returns. Jack bought and placed in service $800,000 of qualified farm machinery in 2009. His wife has her own business, and she bought and placed in service $10,000 of qualified business equipment. Their combined dollar limit is $240,000. This is because they must figure the limit as if they were one taxpayer. They reduce the $250,000 dollar limit by the $10,000 excess of their costs over $800,000.

They elect to allocate the $240,000 dollar limit as follows.

• $228,000 ($240,000 x 95%) to Mr. Elm's machinery.
• $12,000 ($240,000 x 5%) to Mrs. Elm's equipment.

If they did not make an election to allocate their costs in this way, they would have to allocate $120,000 ($240,000 x 50%) to each of them.

Joint return after filing separate returns. If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts.

• The dollar limit (after reduction for any cost of section 179 property over $800,000).
• The total cost of section 179 property you and your spouse elected to expense on your separate returns.

Example. The facts are the same as in the previous example except that Jack elected to deduct $30,000 of the cost of section 179 property on his separate return and his wife elected to deduct $2,000. After the due date of their returns, they file a joint return. Their dollar limit for the section 179 deduction is $32,000. This is the lesser of the following amounts.

• $240,000 -- The dollar limit less the cost of section 179 property over $800,000.
• $32,000 -- The total they elected to expense on their separate returns.

Business Income Limit

The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business.

Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. See Carryover of disallowed deduction, later.

Taxable income. In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. Net income or loss from a trade or business includes the following items.

• Section 1231 gains (or losses).
• Interest from working capital of your trade or business.
• Wages, salaries, tips, or other pay earned as an employee.

For information about section 1231 gains and losses, see chapter 3 in Publication 544.

In addition, figure taxable income without regard to any of the following.

• The section 179 deduction.
• The self-employment tax deduction.
• Any net operating loss carryback or carryforward.
• Any unreimbursed employee business expenses.

Two different taxable income limits. In addition to the business income limit for your section 179 deduction, you may have a taxable income limit for some other deduction. You may have to figure the limit for this other deduction taking into account the section 179 deduction. If so, complete the following steps.

 _______________________________________________________
 Step                      Action
 _______________________________________________________
  1    Figure taxable income without the section 179
       deduction or the other deduction.
 _______________________________________________________
  2    Figure a hypothetical section 179 deduction
       using the taxable income figured in Step 1.
 _______________________________________________________
  3    Subtract the hypothetical section 179 deduction
       figured in Step 2 from the taxable income figured
       in Step 1.
 _______________________________________________________
  4    Figure a hypothetical amount for the other
       deduction using the amount figured in Step 3 as
       taxable income.
 _______________________________________________________
  5    Subtract the hypothetical other deduction figured
       in Step 4 from the taxable income figured in
       Step 1.
 _______________________________________________________
  6    Figure your actual section 179 deduction using
       the taxable income figured in Step 5.
 _______________________________________________________
  7    Subtract your actual section 179 deduction
       figured in Step 6 from the taxable income figured
       in Step 1.
 _______________________________________________________
  8    Figure your actual other deduction using the
       taxable income figured in Step 7.
 _______________________________________________________

Example. On February 1, 2009, the XYZ corporation purchased and placed in service qualifying section 179 property that cost $250,000. It elects to expense the entire $250,000 cost under section 179. In June, the corporation gave a charitable contribution of $10,000. A corporation's limit on charitable contributions is figured after subtracting any section 179 deduction. The business income limit for the section 179 deduction is figured after subtracting any allowable charitable contributions. XYZ's taxable income figured without the section 179 deduction or the deduction for charitable contributions is $270,000. XYZ figures its section 179 deduction and its deduction for charitable contributions as follows.

Step 1 - Taxable income figured without either deduction is $270,000.

Step 2 - Using $270,000 as taxable income, XYZ's hypothetical section 179 deduction is $250,000.

Step 3 - $20,000 ($270,000 - $250,000).

Step 4 - Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000.

Step 5 - $268,000 ($270,000 - $2,000).

Step 6 - Using $268,000 (from Step 5) as taxable income, XYZ figures the actual section 179 deduction. Because the taxable income is at least $250,000, XYZ can take a $250,000 section 179 deduction.

Step 7 - $20,000 ($270,000 - $250,000).

Step 8 - Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000.

Carryover of disallowed deduction. You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. This disallowed deduction amount is shown on line 13 of Form 4562. You use the amount you carry over to determine your section 179 deduction in the next year. Enter that amount on line 10 of your Form 4562 for the next year.

If you place more than one property in service in a year, you can select the properties for which all or a part of the costs will be carried forward. Your selections must be shown in your books and records. For this purpose, treat section 179 costs allocated from a partnership or an S corporation as one item of section 179 property. If you do not make a selection, the total carryover will be allocated equally among the properties you elected to expense for the year.

If costs from more than one year are carried forward to a subsequent year in which only part of the total carryover can be deducted, you must deduct the costs being carried forward from the earliest year first.

TIP:If there is a sale or other disposition of your property (including a transfer at death) before you can use the full amount of any outstanding carryover of your disallowed section 179 deduction, neither you nor the new owner can deduct any of the unused amount. Instead, you must add it back to the property's basis.

Partnerships and Partners

The section 179 deduction limits apply both to the partnership and to each partner. The partnership determines its section 179 deduction subject to the limits. It then allocates the deduction among its partners.

Each partner adds the amount allocated from partnerships (shown on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc.) to his or her nonpartnership section 179 costs and then applies the dollar limit to this total. To determine any reduction in the dollar limit for costs over $800,000, the partner does not include any of the cost of section 179 property placed in service by the partnership. After the dollar limit (reduced for any nonpartnership section 179 costs over $800,000) is applied, any remaining cost of the partnership and nonpartnership section 179 property is subject to the business income limit.

Partnership's taxable income. For purposes of the business income limit, figure the partnership's taxable income by adding together the net income and losses from all trades or businesses actively conducted by the partnership during the year. See the Instructions for Form 1065 for information on how to figure partnership net income (or loss). However, figure taxable income without regard to credits, tax-exempt income, the section 179 deduction, and guaranteed payments under section 707(c) of the Internal Revenue Code.

Partner's share of partnership's taxable income. For purposes of the business income limit, the taxable income of a partner engaged in the active conduct of one or more of a partnership's trades or businesses includes his or her allocable share of taxable income derived from the partnership's active conduct of any trade or business.

Example. In 2009, Beech Partnership placed in service section 179 property with a total cost of $825,000. The partnership must reduce its dollar limit by $25,000 ($825,000 - $800,000). Its maximum section 179 deduction is $225,000 ($250,000 - $25,000), and it elects to expense that amount. The partnership's taxable income from the active conduct of all its trades or businesses for the year was $300,000, so it can deduct the full $225,000. It allocates $40,000 of its section 179 deduction and $50,000 of its taxable income to Dean, one of its partners.

In addition to being a partner in Beech Partnership, Dean is also a partner in the Cedar Partnership, which allocated to him a $30,000 section 179 deduction and $35,000 of its taxable income from the active conduct of its business. He also conducts a business as a sole proprietor and, in 2009, placed in service in that business qualifying section 179 property costing $55,000. He had a net loss of $5,000 from that business for the year.

Dean does not have to include section 179 partnership costs to figure any reduction in his dollar limit, so his total section 179 costs for the year are not more than $800,000 and his dollar limit is not reduced. His maximum section 179 deduction is $250,000. He elects to expense all of the $70,000 in section 179 deductions allocated from the partnerships ($40,000 from Beech Partnership plus $30,000 from Cedar Partnership), plus $55,000 of his sole proprietorship's section 179 costs, and notes that information in his books and records. However, his deduction is limited to his business taxable income of $80,000 ($50,000 from Beech Partnership, plus $35,000 from Cedar Partnership minus $5,000 loss from his sole proprietorship). He carries over $45,000 ($125,000 - $80,000) of the elected section 179 costs to 2010. He allocates the carryover amount to the cost of section 179 property placed in service in his sole proprietorship, and notes that allocation in his books and records.

Different tax years. For purposes of the business income limit, if the partner's tax year and that of the partnership differ, the partner's share of the partnership's taxable income for a tax year is generally the partner's distributive share for the partnership tax year that ends with or within the partner's tax year.

Example. John and James Oak are equal partners in Oak Partnership. Oak Partnership uses a tax year ending January 31. John and James both use a tax year ending December 31. For its tax year ending January 31, 2009, Oak Partnership's taxable income from the active conduct of its business is $80,000, of which $70,000 was earned during 2008. John and James each include $40,000 (each partner's entire share) of partnership taxable income in computing their business income limit for the 2009 tax year.

Adjustment of partner's basis in partnership. A partner must reduce the basis of his or her partnership interest by the total amount of section 179 expenses allocated from the partnership even if the partner cannot currently deduct the total amount. If the partner disposes of his or her partnership interest, the partner's basis for determining gain or loss is increased by any outstanding carryover of disallowed section 179 expenses allocated from the partnership.

Adjustment of partnership's basis in section 179 property. The basis of a partnership's section 179 property must be reduced by the section 179 deduction elected by the partnership. This reduction of basis must be made even if a partner cannot deduct all or part of the section 179 deduction allocated to that partner by the partnership because of the limits.

S Corporations

Generally, the rules that apply to a partnership and its partners also apply to an S corporation and its shareholders. The deduction limits apply to an S corporation and to each shareholder. The S corporation allocates its deduction to the shareholders who then take their section 179 deduction subject to the limits.

Figuring taxable income for an S corporation. To figure taxable income (or loss) from the active conduct by an S corporation of any trade or business, you total the net income and losses from all trades or businesses actively conducted by the S corporation during the year.

To figure the net income (or loss) from a trade or business actively conducted by an S corporation, you take into account the items from that trade or business that are passed through to the shareholders and used in determining each shareholder's tax liability. However, you do not take into account any credits, tax-exempt income, the section 179 deduction, and deductions for compensation paid to shareholder-employees. For purposes of determining the total amount of S corporation items, treat deductions and losses as negative income. In figuring the taxable income of an S corporation, disregard any limits on the amount of an S corporation item that must be taken into account when figuring a shareholder's taxable income.

Other Corporations

A corporation's taxable income from its active conduct of any trade or business is its taxable income figured with the following changes.

1. It is figured before deducting the section 179 deduction, any net operating loss deduction, and special deductions (as reported on the corporation's income tax return).

2. It is adjusted for items of income or deduction included in the amount figured in 1, above, not derived from a trade or business actively conducted by the corporation during the tax year.

How Do You Elect the Deduction?

Terms you may need to know (see Glossary):

• Listed property
• Placed in service

You elect to take the section 179 deduction by completing Part I of Form 4562.

CAUTION:If you elect the deduction for listed property (described in chapter 5), complete Part V of Form 4562 before completing Part I.

For property placed in service in 2009, file Form 4562 with either of the following.

• Your original 2009 tax return, whether or not you file it timely.
• An amended return for 2009 filed within the time prescribed by law. An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. The amended return must also include any resulting adjustments to taxable income.

RECORDS: You must keep records that show the specific identification of each piece of qualifying section 179 property. These records must show how you acquired the property, the person you acquired it from, and when you placed it in service.

Revoking an election. An election (or any specification made in the election) to take a section 179 deduction for 2009 can be revoked without IRS approval by filing an amended return. The amended return must be filed within the time prescribed by law. The amended return must also include any resulting adjustments to taxable income. Once made, the revocation is irrevocable.

When Must You Recapture the Deduction?

Terms you may need to know (see Glossary):

• Disposition
• Exchange
• Recapture
• Recovery period
• Section 1245 property

You may have to recapture the section 179 deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. In the year the business use drops to 50% or less, you include the recapture amount as ordinary income in Part IV of Form 4797. You also increase the basis of the property by the recapture amount. Recovery periods for property are discussed under Which Recovery Period Applies in chapter 4.

CAUTION:If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Instead, use the rules for recapturing depreciation explained in chapter 3 of Publication 544 under Section 1245 Property.

CAUTION: If the property is listed property (described in chapter 5), do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. Instead, use the rules for recapturing excess depreciation in chapter 5 under What Is the Business-Use Requirement.

Figuring the recapture amount. To figure the amount to recapture, take the following steps.

1. Figure the depreciation that would have been allowable on the section 179 deduction you claimed. Begin with the year you placed the property in service and include the year of recapture.

2. Subtract the depreciation figured in (1) from the section 179 deduction you claimed. The result is the amount you must recapture.

Example. In January 2007, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. The property is not listed property. The property is 3-year property. He elected a $5,000 section 179 deduction for the property and also elected not to claim a special depreciation allowance. He used the property only for business in 2007 and 2008. In 2009, he used the property 40% for business and 60% for personal use. He figures his recapture amount as follows.

 Section 179 deduction claimed (2007)                $5,000.00

 Minus: Allowable depreciation using Table A-1
       (instead of section 179 deduction):

 2007                                     $1,666.50
 2008                                      2,222.50
 2009 ($740.50 x 40% (business))             296.20   4,185.20
                                          _________  _________
 2009 -- Recapture amount                             $ 814.80
                                                     =========

Paul must include $814.80 in income for 2009.

CAUTION:If any qualified zone property or qualified renewal property placed in service during the year ceases to be used in an empowerment zone or renewal community by an enterprise zone business or a renewal community business in a later year, the benefit of the increased section 179 deduction must be reported as other income on your return. Similar rules apply to qualified section 179 GO Zone property.

Introduction

You can take a special depreciation allowance to recover part of the cost of qualified property (defined next), placed in service during the tax year. The allowance applies only for the first year you place the property in service. For qualified property placed in service in 2009, you can take an additional 50% (or 30%, if applicable) special allowance. The allowance is an additional deduction you can take after any section 179 deduction and before you figure regular depreciation under MACRS for the year you place the property in service.

This chapter explains what is qualified property. It also includes rules regarding how to figure an allowance, how to elect not to claim an allowance, and when you must recapture an allowance.

TIP:Corporations and certain automotive partnerships can elect to accelerate certain research and minimum tax credits in lieu of claiming the special depreciation allowance for eligible qualified property. See Election to Accelerate Certain Credits in Lieu of the Special Depreciation Allowance on page 32.

See chapter 6 for information about getting publications and forms.

What Is Qualified Property?

Terms you may need to know (see Glossary):

• Business/investment use
• Improvement
• Nonresidential real property
• Placed in service
• Residential rental property
• Structural components

Your property is qualified property if it is one of the following.

• Qualified Liberty Zone property.
• Specified Gulf Opportunity Zone (GO Zone) extension property.
• Qualified Recovery Assistance property.
• Qualified reuse and recycling property.
• Qualified cellulosic biofuel plant property.
• Qualified disaster assistance property.
• Certain qualified property placed in service after December 31, 2007, and before January 1, 2010.

The following discussions provide information about the types of qualified property listed above for which you can take the special depreciation allowance.

Qualified Liberty Zone Property

You can take a special depreciation allowance for qualified Liberty Zone property placed in service before January 1, 2010, that is nonresidential real or residential rental property (defined next).

Nonresidential real property and residential rental property. This property is qualified Liberty Zone property only to the extent it rehabilitates real property damaged, or replaces real property destroyed or condemned, as a result of the events of September 11, 2001. Property is treated as replacing destroyed or condemned property if, as part of an integrated plan, such property replaces real property included in a continuous area that includes real property destroyed or condemned.

For these purposes, real property is considered destroyed (or condemned) only if an entire building or structure was destroyed (or condemned) as a result of the attacks. Otherwise, the property is considered damaged real property. For example, if certain structural components of a building (such as walls, floors, and plumbing fixtures) were damaged or destroyed as a result of the attacks, but the building is not destroyed (or condemned), then only costs related to replacing the damaged or destroyed structural components qualify for the special Liberty Zone depreciation allowance

This property must also meet all of the tests that are discussed under Other Tests To Be Met below.

Other Tests To Be Met

To be qualified Liberty Zone property, the property must also meet all of the following tests.

Acquisition date test. You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2) after September 10, 2001, and there must not have been a binding written contract for the acquisition in effect before September 11, 2001.

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. 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. The property must be placed in service for use in your trade or business before January 1, 2010.

Sale-leaseback. If you sold qualified Liberty Zone property you placed in service after September 10, 2001, and leased it back within 3 months after you originally placed it in service, the property is treated as originally placed in service no earlier than the date it is used by you under the leaseback.

The property will not qualify for the special allowance if the lessee or a related person to the lessee or lessor had a written binding contract in effect for the acquisition of the property before September 11, 2001.

Syndicated leasing transactions. If qualified Liberty Zone property is originally placed in service by a lessor after September 10, 2001, the property is sold within 3 months of the date it was placed in service, and the user of the property does not change, then the property is treated as originally placed in service by the taxpayer no earlier than the date of the last sale.

Multiple units of property subject to the same lease will be treated as originally placed in service no earlier than the date of sale if the property is sold within 3 months after the final unit is placed in service and the period between the times the first and last units are placed in service does not exceed 12 months.

For special rules explaining when property involved in certain other transactions is treated as originally placed in service, see section 1.168(k)-1(b)(5) of the regulations.

Substantial use test. Substantially all (80% or more) of the use of the property must be in the Liberty Zone and in the active conduct of your trade or business in the Liberty Zone.

CAUTION:If the property is held for the production of income, the property does not satisfy this substantial use test and does not qualify for the special depreciation allowance.

Original use test. The original use of the property in the Liberty Zone must have begun with you after September 10, 2001.

Used property can be qualified Liberty Zone property if it has not previously been used within the Liberty Zone. Also, additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test if the original use of the property in the Liberty Zone began with you. 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% of the total cost of the property.

If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after you originally placed the property in service, 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)-1(b)(3) of the regulations.

Excepted Property

Qualified Liberty Zone property does not include any of the following.

• 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 may be qualified Liberty Zone property.
• Property that also qualified for the special depreciation allowance.
• 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.
• Property for which you elected not to claim any special depreciation allowance (discussed later).

Specified Gulf Opportunity Zone Extension Property

You can take a special depreciation allowance for specified Gulf Opportunity Zone (GO Zone) extension property (defined below) placed in service in specified portions of the GO Zone. Specified GO Zone extension property must meet certain tests, explained under Other Tests To Be Met on page 26. Also, specified GO Zone extension property cannot be excepted property, explained under Excepted Property on page 27.

Specified GO Zone extension property. Specified GO Zone extension property includes any of the following property.

• Nonresidential real property or residential rental property placed in service in specified portions of the GO Zone (discussed below) before January 1, 2011, or
• Any of the following types of property placed in service in a building described above before January 1, 2011:

1. Tangible property depreciated under the modified accelerated recovery system (MACRS) with a recovery period of 20 years or less. See Which Method Can You Use To Depreciate Your Property in chapter 1.

2. Water utility property, which is either (a) 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 or (b) any municipal sewer.

3. Computer 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 below.

In addition, substantially all (80% or more) of the use of the property described in (1) through (4) above must be in the building and placed in service no later than 90 days after the building is placed in service.

Specified portions of the GO Zone are those counties or parishes in the GO Zone that are identified by the IRS as having more than 60% of the occupied housing units damaged by the hurricanes occurring during 2005. For guidance identifying the affected counties and parishes eligible for the extension of the placed in service date, see Notice 2007-36 on page 1000 of the Internal Revenue Bulletin 2007-17, available at www.irs.gov/pub/irs-irbs/irb07-17.pdf.

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

• The improvement is made under or according 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.

1. Members of an affiliated group.

2. 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.

3. A corporation and an individual who directly or indirectly owns 80% or more of the value of the outstanding stock of that corporation.

4. Two corporations that are members of the same controlled group.

5. 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.

6. The grantor and fiduciary, and the fiduciary and beneficiary, of any trust.

7. 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.

8. A tax-exempt educational or charitable organization and any person (or, if that person is an individual, a member of that person's family) who directly or indirectly controls the organization.

9. 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.

10. A corporation and a partnership if the same persons own both of the following.

a. 80% or more of the value of the outstanding stock of the corporation.

b. 80% or more of the capital or profits interest in the partnership.

11. The executor and beneficiary of any estate.

Other Tests To Be Met

To be specified GO Zone extension property, the property must also meet all of the following tests.

Acquisition date test. You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2) after August 27, 2005, with no binding written contract for the acquisition in effect before August 28, 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 August 27, 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. The property must be placed in service before January 1, 2010, for use in your trade or business located in specified portions of the GO Zone.

Sale-leaseback. If you sold specified GO Zone extension property you placed in service after August 27, 2005, and leased it back within 3 months after you originally placed it in service, the property is treated as originally placed in service no earlier than the date it is used by you under the leaseback.

The property will not qualify for the special allowance if the lessee or a related person to the lessee or lessor had a written binding contract in effect for the acquisition of the property before August 28, 2005.

Syndicated leasing transactions. If the property is originally placed in service by a lessor after August 27, 2005, the property is sold within 3 months of the date it was placed in service, and the user of the property does not change, then the property is treated as originally placed in service by the taxpayer no earlier than the date of the last sale.

Multiple units of property subject to the same lease will be treated as originally placed in service no earlier than the date of sale if the property is sold within 3 months after the final unit is placed in service and the period between the times the first and last units are placed in service does not exceed 12 months.

Substantial use test. Substantially all (80% or more during each tax year) of the use of the property must be in the specified areas of GO Zone and in the active conduct of your trade or business in the GO Zone.

CAUTION:If the property is held for the production of income, the property does not satisfy this substantial use test and does not qualify for the special depreciation allowance.

Original use test. The original use of the property in the GO Zone must have begun with you after August 27, 2005.

Used property can be specified GO Zone extension property if it has not previously been used within the specified portions of the GO Zone. Also, additional capital expenditures you incurred after August 27, 2005, to recondition or rebuild your property meet the original use test if the original use of the property in the GO Zone began with you. For further guidance on the original use requirement for the GO Zone additional first year depreciation deduction, see Notice 2007-36 on page 1000 of Internal Revenue Bulletin 2007-17.

If you sold property you placed in service after August 27, 2005, and you leased it back within 3 months after you originally placed the property in service, the lessor is considered to be the original user of the property.

If you acquire new property for personal use and then use the property in your trade or business or for the production of income, you are considered to be the original user.

For special rules identifying the original user of property involved in certain other transactions and the original user of fractional interests in property, see Regulations section 1.168(k)-1(b)(3).

Excepted Property

Specified GO Zone extension property does not include any of the following.

• 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.
• Property any portion of which is financed with the proceeds of a tax-exempt obligation under section 103 of the Internal Revenue Code.
• Any qualified revitalization building (described below) placed in service before January 1, 2010, for which you have elected to claim a commercial revitalization deduction for qualified revitalization expenditures.
• Any property used in connection with any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, or any store, the principal business of which is the sale of alcoholic beverages for consumption off premises.
• Any gambling or animal racing property (defined below).
• Property for which you elected not to claim any special depreciation allowance (discussed later).
• 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 may be qualified GO Zone property.
• Other bonus depreciation property to which section 168(k) of the Internal Revenue Code applies.

Qualified revitalization building. This is a commercial building and its structural components that you placed in service in a renewal community. If the building is new, the original use of the building must begin with you. If the building is not new, you must substantially rehabilitate the building and then place it in service. For more information, including definitions of substantially rehabilitated building and qualified revitalization expenditure, see Publication 954, Tax Incentives for Distressed Communities.

Gambling or animal racing property. Gambling or animal racing property includes the following personal and real property.

• Any equipment, furniture, software, or other property used directly in connection with gambling, the racing of animals, or the on-site viewing of such racing.
• Any real property determined by square footage (other than any portion that is less than 100 square feet) that is dedicated to gambling, the racing of animals, or the on-site viewing of such racing.

Additional guidance. For additional guidance with respect to the 50% additional first-year depreciation deduction for qualified GO Zone property, see Notice 2006-77 on page 590 of Internal Revenue Bulletin 2006-40, available at www.irs.gov/pub/irs-irbs/irb06-40.pdf and Notice 2007-36 on page 1000 of Internal Revenue Bulletin 2007-17, available at www.irs.gov/pub/irs-irbs/irb07-17.pdf.

Qualified Recovery Assistance Property

You can take a special depreciation allowance for qualified Recovery Assistance property you acquired after May 4, 2007, and placed in service in the Kansas disaster area. The Kansas disaster area is generally located in Kiowa County, Kansas, and surrounding areas. For a complete list of the affected areas, see Pub. 4492-A. Your property is qualified Recovery Assistance property if it meets the following requirements.

1. It is nonresidential real property or residential rental property.

2. It is property that meets certain tests (explained next under Other Tests To Be Met).

3. It is not excepted property (explained under Excepted Property below).

Other Tests To Be Met

To be qualified Recovery Assistance property, the property must also meet all of the following tests.

Acquisition date test. You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2) after May 4, 2007, with no binding written contract for the acquisition in effect before May 5, 2007.

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 4, 2007, and before January 1, 2009. 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. The property must be placed in service for use in your trade or business before January 1, 2010.

Sale-leaseback. If you sold qualified Recovery Assistance property you placed in service after May 4, 2007, and leased it back within 3 months after you originally placed it in service, the property is treated as originally placed in service no earlier than the date it is used by you under the leaseback.

The property will not qualify for the special allowance if the lessee or a related person to the lessee or lessor had a written binding contract in effect for the acquisition of the property before May 5, 2007.

Syndicated leasing transactions. If qualified Recovery Assistance property is originally placed in service by a lessor after May 4, 2007, the property is sold within 3 months of the date it was placed in service, and the user of the property does not change, then the property is treated as originally placed in service by the taxpayer no earlier than the date of the last sale.

Multiple units of property subject to the same lease will be treated as originally placed in service no earlier than the date of sale if the property is sold within 3 months after the final unit is placed in service and the period between times the first and last units are placed in service does not exceed 12 months.

Substantial use test. Substantially all (80% or more) of the use of the property must be in the Kansas disaster area and in the active conduct of your trade or business in the Kansas disaster area.

Original use test. The original use of the property in the Kansas disaster area must have begun with you after May 4, 2007.

Used property can be qualified Recovery Assistance property if it has not previously been used within the Kansas disaster area. Also, additional capital expenditures you incurred after May 4, 2007, to recondition or rebuild your property meet the original use test if the original use of the property in the Kansas disaster area began with you.

If you sold property you placed in service after May 4, 2007, and you leased it back within 3 months after you originally placed the property in service, the lessor is considered to be the original user of the property.

Excepted Property

Qualified Recovery Assistance property does not include any of the following.

• Property required to be depreciated using the Alternative Depreciation System (ADS). 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.
• Property any portion of which is financed with the proceeds of a tax-exempt obligation under section 103 of the Internal Revenue Code.
• Any qualified revitalization building (defined earlier under Qualified revitalization building on page 27) placed in service before January 1, 2010, for which you have elected to claim a commercial revitalization deduction for qualified revitalization expenditures.
• Property for which you elected not to claim any special depreciation allowance (discussed later).
• 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 acquired. Property converted from personal use to business use in the same or later tax year may be qualified Recovery Assistance property.
• Other bonus depreciation property to which section 168(k) of the Internal Revenue Code applies.

Qualified Reuse and Recycling Property

You can take a special depreciation allowance for qualified reuse and recycling property. Qualified reuse and recycling property is any machinery or equipment (not including buildings or real estate), along with any appurtenance, that is used exclusively to collect, distribute, or recycle qualified reuse and recyclable materials (as defined in section 168(m)(3)(B) of the Internal Revenue Code). Qualified reuse and recycling property also includes software necessary to operate such equipment. The property must meet the following requirements.

• The property must be depreciated under MACRS.
• The property must have a useful life of at least 5 years.
• The original use of the property must begin with you after August 31, 2008.
• You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2) after August 31, 2008, with no binding written contract for the acquisition in effect before September 1, 2008.
• The property must be placed in service for use in your trade or business after August 31, 2008.

  Special Rules

Self-constructed property. 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 August 31, 2008. 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.

Excepted Property

Qualified reuse and recycling property does not include any of the following.

• Any rolling stock or other equipment used to transport reuse or recyclable materials.
• Property required to be depreciated using the Alternative Depreciation System (ADS). 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.
• Other bonus depreciation property to which section 168(k) of the Internal Revenue Code applies.
• Property for which you elected not to claim any special depreciation allowance (discussed later).
• 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 acquired. Property converted from personal use to business use in the same or later tax year may be qualified reuse and recycling property.

Qualified Cellulosic Biofuel Plant Property

You can take a special depreciation allowance for qualified cellulosic biofuel plant property. Cellulosic biofuel is any liquid fuel which is produced from any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis. Examples include bagasse (from sugar cane), corn stalks, and switchgrass. The property must meet the following requirements.

1. The property is used in the United States solely to produce cellulosic biofuel.

2. The original use of the property must begin with you after December 20, 2006.

3. You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2) after December 20, 2006, with no binding written contract for acquisition in effect before December 21, 2006.

4. The property must be placed in service for use in your trade or business or for the production of income after October 3, 2008, and before January 1, 2013.

Special Rules

Self-constructed property. 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 December 20, 2006. 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.

Sale-leaseback. If you sold qualified cellulosic biofuel plant property you placed in service after October 3, 2008, and leased it back within 3 months after you originally placed it in service, the property is treated as originally placed in service no earlier than the date it is used by you under the leaseback.

The property will not qualify for the special allowance if the lessee or a related person to the lessee or lessor had a written binding contract in effect for the acquisition of the property before December 21, 2006.

Syndicated leasing transactions. If qualified cellulosic biofuel plant property is originally placed in service by a lessor after October 3, 2008, the property is sold within 3 months of the date it was placed in service, and the user of the property does not change, then the property is treated as originally placed in service by the taxpayer no earlier than the date of the last sale.

Multiple units of property subject to the same lease will be treated as originally placed in service no earlier than the date of sale if the property is sold within 3 months after the final unit is placed in service and the period between the times the first and last units are placed in service does not exceed 12 months.

Excepted Property

Qualified cellulosic biofuel plant property does not include any of the following.

• 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 may be qualified cellulosic biomass ethanol plant property.
• Property required to be depreciated using the Alternative Depreciation System (ADS). 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.
• Property any portion of which is financed with the proceeds of any obligation the interest on which is exempt from tax under section 103 of the Internal Revenue Code.
• Property for which you elected not to claim any special depreciation allowance (discussed later).
• Property for which a deduction was taken under section 179C for certain qualified refinery property.
• Other bonus depreciation property to which section 168(k) of the Internal Revenue Code applies.

Qualified Disaster Assistance Property

You can take a special depreciation allowance for qualified disaster assistance property placed in service in federally declared disaster areas in which the disaster occurred before January 1, 2010. A list of the federally declared disaster areas is available at the FEMA website at www.fema.gov. Your property is qualified disaster assistance property if it meets the following requirements.

1. It is one of the following types of property.

a. Tangible property depreciated under MACRS with a recovery period of 20 years or less.

b. Water utility property.

c. Computer 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.)

d. Qualified leasehold improvement property (defined under Qualified leasehold improvement property on page 25).

e. Nonresidential real property and residential rental property.

2. You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2) on or after the applicable disaster date, with no binding written contract for the acquisition in effect before the applicable disaster date.

3. The property must rehabilitate property damaged, or replace property destroyed or condemned, as a result of the applicable federally declared disaster.

4. The property must be similar in nature to, and located in the same county as, the rehabilitated or replaced property.

5. The original use of the property within the applicable disaster area must have begun with you on or after the applicable disaster date.

6. The property is placed in service by you on or before the date which is the last day of the third calendar year following the applicable disaster date (the fourth calendar year in the case of nonresidential real property and residential rental property).

7. Substantially all (80% or more) of the use of the property must be in the active conduct of your trade or business in a federally declared disaster area, occurring before January 1, 2010.

8. It is not excepted property (explained later in Excepted Property).

Special Rules

Self-constructed property. 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 the applicable disaster date. 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.

Sale-leaseback. If you sold qualified disaster assistance property you placed in service after the applicable disaster date and leased it back within 3 months after you originally placed it in service, the property is treated as originally placed in service no earlier than the date it is used by you under the leaseback.

The property will not qualify for the special allowance if the lessee or a related person to the lessee or lessor had a written binding contract in effect for the acquisition of the property before the applicable disaster date.

Syndicated leasing transactions. If qualified disaster assistance property is originally placed in service by a lessor after the applicable disaster date, the property is sold within 3 months of the date it was placed in service, and the user of the property does not change, then the property is treated as originally placed in service by the taxpayer no earlier than the date of the last sale.

Multiple units of property subject to the same lease will be treated as originally placed in service no earlier than the date of sale if the property is sold within 3 months after the final unit is placed in service and the period between the times the first and last units are placed in service does not exceed 12 months.

Excepted Property

Qualified disaster assistance property does not include any of the following.

• Property required to be depreciated using the Alternative Depreciation System (ADS). 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.
• Property any portion of which is financed with the proceeds of a tax-exempt obligation under section 103 of the Internal Revenue Code.
• Any qualified revitalization building (defined earlier under Qualified revitalization building on page 27) placed in service before January 1, 2010, for which you have elected to claim a commercial revitalization deduction for qualified revitalization expenditures.
• Any property used in connection with any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, or any store, the principal business of which is the sale of alcoholic beverages for consumption off premises.
• Any property for which the special allowance under section 168(k) or section 1400N(d) of the Internal Revenue Code applies.
• Property for which you elected not to claim any special depreciation allowance (discussed later).
• 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 acquired. Property converted from personal use to business use in the same or later tax year may be qualified disaster assistance property.
• Any gambling or animal racing property (defined earlier under Excepted Property on page 27).

Certain Qualified Property Acquired After December 31, 2007

You can take a special depreciation deduction allowance for certain qualified property acquired after December 31, 2007. Your property is qualified property if it meets the following requirements.

1. It is one of the following types of property.

a. Tangible property depreciated under MACRS with a recovery period of 20 years or less.

b. Water utility property.

c. Computer 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.)

d. Qualified leasehold improvement property (defined under Qualified leasehold improvement property on page 25).

2. You must have acquired the property by purchase after December 31, 2007, with no binding written contract for the acquisition of in effect before January 1, 2008.

3. The property must be placed in service for use in your trade or business or for the production of income before January 1, 2010 (before January 1, 2011, for certain property with a long production period and certain aircraft (defined next)).

4. The original use of the property must begin with you after December 31, 2007.

5. It is not excepted property (explained later in Excepted Property).

Long Production Period Property

To be qualified property, long production period property must meet the following requirements.

• It must meet the requirements of (2)-(5), above.
• The property has a recovery period of at least 10 years or is transportation property. Transportation property is tangible personal property used in the trade or business of transporting persons or property.
• The property is subject to section 263A of the Internal Revenue Code.
• The property has an estimated production period exceeding 1 year and an estimated production cost exceeding $1,000,000.

  Noncommercial Aircraft

To be qualified property, noncommercial aircraft must meet the following requirements.

• It must meet the requirements in (2)-(5), above.
• The aircraft must not be tangible personal property used in the trade or business of transporting persons or property (except for agricultural or firefighting purposes).
• The aircraft must be purchased (as discussed under Property Acquired by Purchase in chapter 2) by a purchaser who at the time of the contract for purchase, makes a nonrefundable deposit of the lesser of 10% of the cost or $100,000.
• The aircraft must have an estimated production period exceeding four months and a cost exceeding $200,000.

  Special Rules

Self-constructed property. 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 December 31, 2007, and before January 1, 2010. 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.

Sale-leaseback. If you sold qualified property you placed in service after December 31, 2007, and leased it back within 3 months after you originally placed in service, the property is treated as originally placed in service no earlier than the date it is used by you under the leaseback.

The property will not qualify for the special depreciation allowance if the lessee or a related person to the lessee or lessor had a written binding contract in effect for the acquisition of the property before January 1, 2008.

Syndicated leasing transactions. If qualified property is originally placed in service by a lessor after December 31, 2007, the property is sold within 3 months of the date it was placed in service, and the user of the property does not change, then the property is treated as originally placed in service by the taxpayer no earlier than the date of the last sale.

Multiple units of property subject to the same lease will be treated as originally placed in service no earlier than the date of the last sale if the property is sold within 3 months after the final unit is placed in service and the period between the time the first and last units are placed in service does not exceed 12 months.

Excepted Property

Qualified property does not include any of the following.

• 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 acquired. Property converted from personal use to business use in the same or later tax year may be qualified property.
• Property required to be depreciated under 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 restaurant property (as defined in section 168(e)(7) of the Internal Revenue Code) placed in service before January 1, 2010.
• Qualified retail improvement property (as defined in section 168(e)(8) of the Internal Revenue Code) placed in service before January 1, 2010.
• Property for which you elected not to claim any special depreciation allowance (discussed later).
• Property for which you elected to accelerate certain credits in lieu of the special depreciation allowance (discussed next).

Election to Accelerate Certain Credits in Lieu of the Special Depreciation Allowance

Corporations and certain automotive partnerships can elect for their first tax year ending after March 31, 2008, to accelerate pre-2006 unused research credits or minimum tax credits in lieu of claiming the special depreciation allowance for certain eligible qualified property (as defined in section 168(k)(4)(D) of the Internal Revenue Code) (the "section 168(k)(4) election"). Generally, this election applies to eligible qualified property acquired after March 31, 2008, and placed in service before January 1, 2009 (before January 1, 2010, for long production period property and noncommercial aircraft (defined earlier)).

A section 168(k)(4) election made by a corporation for its first tax year ending after March 31, 2008, continues to apply to extension property (as defined in section 168(k)(4)(H) of the Internal Revenue Code) unless the corporation makes an election not to apply the section 168(k)(4) election to extension property. Generally, extension property is eligible qualified property acquired after March 31, 2008, and placed in service after December 31, 2008, and before January 1, 2010. Long production period property and noncommercial aircraft are extension property if acquired after March 31, 2008, and placed in service after December 31, 2009, and before January 1, 2011. If a corporation did not make a section 168(k)(4) election for its first tax year ending after March 31, 2008, the corporation can elect for its first take year ending after December 31, 2008, to claim pre-2006 unused research credits or minimum tax credits in lieu of claiming the special depreciation allowance for only extension property. A section 168(k)(4) election made by a certain automotive partnership does not apply to extension property.

If you make an election to accelerate these credits in lieu of claiming the special depreciation allowance for eligible property, you must not take the 50% special depreciation allowance for the property and must depreciate the basis in the property under MACRS using the straight line method. See Which Depreciation Method Applies in chapter 4.

Once made, the election cannot be revoked without IRS consent.

Additional guidance. For additional guidance on the election to accelerate the research or minimum tax credit in lieu of claiming the special depreciation allowance, see Rev. Proc. 2008-65 on page 1082 of Internal Revenue Bulletin 2008-44, available at www.irs.gov/pub/irs-irbs/irb08-44.pdf, Rev. Proc. 2009-16 on page 449 of Internal Revenue Bulletin 2009-06, available at www.irs.gov/pub/irs-irbs/irb09-06.pdf, and Rev. Proc. 2009-33 on page 150 of Internal Revenue Bulletin 2009-29, available at www.irs.gov/pub/irs-irbs/irb09-29.pdf. Also, see Form 3800, General Business Credit; Form 8827, Credit for Prior Year Minimum Tax -- Corporations; and related instructions.

Additional guidance may also be available in later Internal Revenue Bulletins available at www.irs.gov/irb.

How Much Can You Deduct?

Terms you may need to know (see Glossary):

• Adjusted basis
• Basis
• Placed in service

Figure the special depreciation allowance by multiplying the depreciable basis of the qualified property by 50% (or 30% if applicable). For qualified Liberty Zone property, multiply the depreciable basis by 30%. For qualified GO Zone property, qualified Recovery Assistance property, qualified reuse and recycling property, qualified cellulosic biofuel plant property, qualified disaster assistance property, and certain qualified property acquired after December 31, 2007, multiply the depreciable basis by 50%.

For qualified property other than listed property, enter the special allowance on line 14 in Part II of Form 4562. For qualified property that is listed property, enter the special allowance on line 25 in Part V of Form 4562.

TIP:If you place qualified property in service in a short tax year, you can take the full amount of a special depreciation allowance.

Depreciable basis. This is the property's cost or other basis multiplied by the percentage of business/investment use, reduced by the total amount of any credits and deductions allocable to the property.

The following are examples of some credits and deductions that reduce depreciable basis.

• Any section 179 deduction.
• Any deduction for removal of barriers to the disabled and the elderly.
• Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services.
• Basis adjustment to investment credit property under section 50(c) of the Internal Revenue Code.

For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code.

For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property in chapter 1. For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing Activity in chapter 1.

Depreciating the remaining cost. After you figure your special depreciation allowance for your qualified property, you can use the remaining cost to figure your regular MACRS depreciation deduction (discussed in chapter 4). Therefore, you must reduce the depreciable basis of the property by the special depreciation allowance before figuring your regular MACRS depreciation deduction.

Example 1. On November 1, 2009, Tom Brown bought and placed in service in his business qualified Recovery Assistance property that cost $450,000. He did not elect to claim a section 179 deduction. He deducts 50% of the cost ($225,000) as a special depreciation allowance for 2009. He uses the remaining $225,000 of cost to figure his regular MACRS depreciation deduction for 2009 and later years.

Example 2. The facts are the same as in Example 1, except that Tom elects to deduct $325,000 ($250,000 + the increased dollar limit of $100,000 for qualified Recovery Assistance property) of the property's cost as a section 179 deduction. He uses the remaining $125,000 of cost to figure his special depreciation allowance of $62,500 ($125,000 x 50%). He uses the remaining $62,500 of cost to figure his regular MACRS depreciation deduction for 2009 and later years.

Like-kind exchanges and involuntary conversions. If you acquire qualified property in a like-kind exchange or involuntary conversion, the carryover basis of the acquired property is eligible for a special depreciation allowance. After you figure your special allowance, you can use the remaining carryover basis to figure your regular MACRS depreciation deduction. In the year you claim the allowance (the year you place in service the property received in the exchange or dispose of involuntarily converted property), you must reduce the carryover basis of the property by the allowance before figuring your regular MACRS depreciation deduction. See Figuring the Deduction for Property Acquired in a Nontaxable Exchange, in chapter 4, under How Is the Depreciation Deduction Figured. The excess basis (the part of the acquired property's basis that exceeds its carryover basis) is also eligible for a special depreciation allowance.

How Can You Elect Not To Claim an Allowance?

You can elect, for any class of property, not to deduct any special allowances for all property in such class placed in service during the tax year.

To make an election, attach a statement to your return indicating what election you are making and the class of property for which you are making the election.

When to make election. Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place 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 the original return (not including extensions). Attach the election statement to the amended return. On the amended return, write "Filed pursuant to section 301.9100-2."

Revoking an election. Once you elect not to deduct a special depreciation allowance for a class of property, you cannot revoke the election without IRS consent. A request to revoke the election is a request for a letter ruling.

CAUTION:If you elect not to have any special allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation.

When Must You Recapture an Allowance?

When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable. See When Do You Recapture MACRS Depreciation in chapter 4 for more information.

Recapture of allowance deducted for qualified GO Zone property. If, in any year after the year you claim the special depreciation allowance for qualified GO Zone property (including specified GO Zone extension property), the property ceases to be used in the GO Zone, you may have to recapture as ordinary income the excess benefit you received from claiming the special depreciation allowance. For additional guidance, see Notice 2008-25 on page 484 of Internal Revenue Bulletin 2008-9.

Qualified cellulosic biomass ethanol plant property and qualified cellulosic biofuel plant property. If, in any year after the year you claim the special depreciation allowance for any qualified cellulosic biomass ethanol plant property or qualified biofuel plant property, the property ceases to be qualified cellulosic biomass ethanol plant property or qualified biofuel plant property, you may have to recapture as ordinary income the excess benefit you received from claiming the special depreciation allowance.

Recapture of allowance for qualified Recovery Assistance property. If, in any year after the year you claim the special depreciation allowance for qualified Recovery Assistance property, the property ceases to be used in the Kansas disaster area, you may have to recapture as ordinary income the excess benefit you received from claiming the special depreciation allowance. For additional guidance, see Notice 2008-67 on page 307 of Internal Revenue Bulletin 2008-32.

Recapture of allowance for qualified disaster assistance property. If, in any year after the year you claim the special depreciation allowance for qualified disaster assistance property, the property ceases to be used in the applicable disaster area, you may have to recapture as ordinary income the excess benefit you received from claiming the special depreciation allowance.

For additional guidance, see Notice 2008-67 on page 307 of Internal Revenue Bulletin 2008-32.

Introduction

The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions.

CAUTION:To be sure you can use MACRS to figure depreciation for your property, see Which Method Can You Use To Depreciate Your Property in chapter 1.

This chapter explains how to determine which MACRS depreciation system applies to your property. It also discusses other information you need to know before you can figure depreciation under MACRS. This information includes the property's recovery class, placed in service date, and basis, as well as the applicable recovery period, convention, and depreciation method. It explains how to use this information to figure your depreciation deduction and how to use a general asset account to depreciate a group of properties. Finally, it explains when and how to recapture MACRS depreciation.

Useful Items

You may want to see:

Publication

• 225 Farmer's Tax Guide
• 463 Travel, Entertainment, Gift, and Car Expenses
• 544 Sales and Other Dispositions of Assets
• 551 Basis of Assets
• 587 Business Use of Your Home (Including Use by Daycare Providers)

Form (and Instructions)

• 2106 Employee Business Expenses
• 2106-EZ Unreimbursed Employee Business Expenses
• 4562 Depreciation and Amortization

See chapter 6 for information about getting publications and forms.

Which Depreciation System (GDS or ADS) Applies?

Terms you may need to know (see Glossary):

• Listed property
• Nonresidential real property
• Placed in service
• Property class
• Recovery period
• Residential rental property
• Tangible property
• Tax exempt

Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines what depreciation method and recovery period you use. You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS.

If you placed your property in service in 2009, complete Part III of Form 4562 to report depreciation using MACRS. Complete section B of Part III to report depreciation using GDS, and complete section C of Part III to report depreciation using ADS. If you placed your property in service before 2009 and are required to file Form 4562, report depreciation using either GDS or ADS on line 17 in Part III.

Required use of ADS. You must use ADS for the following property.

• Listed property used 50% or less in a qualified business use. See chapter 5 for information on listed property.
• Any tangible property used predominantly outside the United States during the year.
• Any tax-exempt use property.
• Any tax-exempt bond-financed property.
• All property used predominantly in a farming business and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect.
• Any property imported from a foreign country for which an Executive Order is in effect because the country maintains trade restrictions or engages in other discriminatory acts.

  CAUTION: If you are required to use ADS to depreciate your property, you cannot claim any special depreciation allowance (discussed in chapter 3) for the property.

Electing ADS. Although your property may qualify for GDS, you can elect to use ADS. The election generally must cover all property in the same property class that you placed in service during the year. However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Once you make this election, you can never revoke it.

You make the election by completing line 20 in Part III of Form 4562.

Which Property Class Applies Under GDS?

Terms you may need to know (see Glossary):

• Class life
• Nonresidential real property
• Placed in service
• Property class
• Recovery period
• Residential rental property
• Section 1245 property
• Section 1250 property

The following is a list of the nine property classifications under GDS and examples of the types of property included in each class. These property classes are also listed under column (a) in section B, Part III, of Form 4562. For detailed information on property classes, see Appendix B, Table of Class Lives and Recovery Periods, in this publication.

1. 3-year property.

a. Tractor units for over-the-road use.

b. Any race horse over 2 years old when placed in service. (All race horses placed in service after December 31, 2008, and before January 1, 2014, are deemed to be 3-year property, regardless of age.)

c. Any other horse (other than a race horse) over 12 years old when placed in service.

d. Qualified rent-to-own property (defined later).

2. 5-year property.

a. Automobiles, taxis, buses, and trucks.

b. Computers and peripheral equipment.

c. Office machinery (such as typewriters, calculators, and copiers).

d. Any property used in research and experimentation.

e. Breeding cattle and dairy cattle.

f. Appliances, carpets, furniture, etc., used in a residential rental real estate activity.

g. Certain geothermal, solar, and wind energy property.

h. Certain farm machinery or equipment (defined later) placed in service before January 1, 2010.

3. 7-year property.

a. Office furniture and fixtures (such as desks, files, and safes).

b. Agricultural machinery and equipment.

c. Any property that does not have a class life and has not been designated by law as being in any other class.

d. Certain motorsports entertainment complex property placed in service before January 1, 2010 (defined later).

e. Any natural gas gathering line placed in service after April 11, 2005. See Natural gas gathering line, natural gas distribution line, and electric transmission property, later.

4. 10-year property.

a. Vessels, barges, tugs, and similar water transportation equipment.

b. Any single purpose agricultural or horticultural structure.

c. Any tree or vine bearing fruits or nuts.

d. Qualified small electric meter and qualified smart electric grid system (defined later) placed in service on or after October 3, 2008.

5. 15-year property.

a. Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges).

b. Any retail motor fuels outlet (defined later), such as a convenience store.

c. Any municipal wastewater treatment plant.

d. Any qualified leasehold improvement property (defined later) placed in service before January 1, 2010.

e. Any qualified restaurant property (defined later) placed in service before January 1, 2010.

f. Initial clearing and grading land improvements for gas utility property.

g. Electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity placed in service after April 11, 2005. See Natural gas gathering line, natural gas distribution line, and electric transmission property, later.

h. Any natural gas distribution line placed in service after April 11, 2005. See Natural gas gathering line, natural gas distribution line, and electric transmission property, later.

i. Any qualified retail improvement property placed in service before January 1, 2010.

6. 20-year property.

a. Farm buildings (other than single purpose agricultural or horticultural structures).

b. Municipal sewers not classified as 25-year property.

c. Initial clearing and grading land improvements for electric utility transmission and distribution plants.

7. 25-year property. This class is water utility property, which is either of the following.

a. 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.

b. Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996.

8. Residential rental property. This is any building or structure, such as a rental home (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, 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.

9. Nonresidential real property. This is section 1250 property, such as an office building, store, or warehouse, that is neither residential rental property nor property with a class life of less than 27.5 years.

If your property is not listed above, you can determine its property class from the Table of Class Lives and Recovery Periods in Appendix B. The property class is generally the same as the GDS recovery period indicated in the table.

Qualified 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. It 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 still can treat this property as qualified property as long as it does not represent a significant portion of your leasing property. However, 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.

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 for the use of consumer property.
• 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 which --

• Is titled "Rent-to-Own Agreement," "Lease Agreement with Ownership Option," or other similar language.
• Provides 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).
• Provides 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% of the largest payment.
• Provides for total payments that generally exceed the normal retail price of the property plus interest.
• Provides for total payments that do not exceed $10,000 for each item of property.
• Provides 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 with no further obligations and no entitlement to a return of any prior payments.
• Provides 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.
• Provides 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.

Certain farm machinery or equipment. Any machinery or equipment (other than grain bins, cotton ginning assets, fences, or other land improvements) used in a farming business (as defined in section 263A(e)(4) of the Internal Revenue Code) where the original use begins with you after December 31, 2008, and is placed in service before January 1, 2010.

Motorsports entertainment complex. This is a racing track facility permanently situated on land that hosts one or more racing events for automobiles, trucks, or motorcycles during the 36-month period after the first day of the month in which the facility is placed in service. The events must be open to the public for the price of admission.

Qualified smart electric grid system. A qualified smart electric grid system means any smart grid property used as part of a system for electric distribution grid communications, monitoring, and management placed in service after October 3, 2008, by a taxpayer who is a supplier of electrical energy or a provider of electrical energy services. Smart grid property includes electronics and related equipment that is capable of:

• Sensing, collecting, and monitoring data of or from all portions of a utility's electric distribution grid,
• Providing real-time, two-way communications to monitor or to manage the grid, and
• Providing real-time analysis of an event prediction based on collected data that can be used to provide electric distribution system reliability, quality, and performance.

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 (whether or not it is also used to sell food or other convenience items) and 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.

Qualified leasehold improvement property. Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2010) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met.

In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor's death or in any of the following types of transactions.

1. A transaction to which section 381(a) applies,

2. A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business,

3. A like-kind exchange, involuntary conversion, or reacquisition of real property to the extent that the basis in the property represents the carryover basis, or

4. Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor's or distributor's basis in the property. Examples include the following.

a. A complete liquidation of a subsidiary.

b. A transfer to a corporation controlled by the transferor.

c. An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization.

Qualified restaurant property. Qualified restaurant property is any section 1250 property that is a building placed in service after December 31, 2008, and before January 1, 2010. Also, more than 50% of the building's square footage must be devoted to preparation of meals and seating for on-premise consumption of prepared meals.

Qualified smart electric meter. A qualified smart electric meter is any time-based meter and related communication equipment which is placed in service by a supplier of electric energy or a provider of electric energy services and which is capable of being used by you as part of a system that:

• Measures and records electricity usage data on a time-differentiated basis in at least 24 separate time segments per day;
• Provides for the exchange of information between the supplier or provider and the customer's smart electric meter in support of time-based rates or other forms of demand response;
• Provides data to the supplier or provider so that the supplier or provider can provide energy usage information to customers electronically, and
• Provides all commercial and residential customers of such supplier or provider with net metering. Net metering means allowing a customer a credit, if any, as complies with applicable federal and state laws and regulations for providing electricity to the supplier or provider.

Natural gas gathering line, natural gas distribution line, and electric transmission property. Any natural gas gathering line placed in service after April 11, 2005, is treated as 7-year property, and electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity and any natural gas distribution line placed in service after April 11, 2005, are treated as 15-year property, if the following requirements are met.

• The original use of the property must have begun with you after April 11, 2005. Original use means the first use to which the property is put, whether or not by you. Therefore, property used by any person before April 12, 2005, is not original use. Original use includes additional capital expenditures you incurred to recondition or rebuild your property. However, original use does not include the cost of reconditioned or rebuilt property you acquired. Property containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20% of the total cost of the property.
• The property must not be placed in service under a binding contract in effect before April 12, 2005.
• The property must not be self-constructed property (property you manufacture, construct, or produce for your own use), if you began the manufacture, construction, or production of the property before April 12, 2005. Property that is manufactured, constructed, or produced for your use by another person under a written binding contract entered into by you or a related party before the manufacture, construction, or production of the property, is considered to be manufactured, constructed, or produced by you.

What Is the Placed in Service Date?

Terms you may need to know (see Glossary):

• Placed in service

You begin to claim depreciation when your property is placed in service for either use in a trade or business or the production of income. The placed in service date for your property is the date the property is ready and available for a specific use. It is therefore not necessarily the date it is first used. 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. See Placed in Service under When Does Depreciation Begin and End in chapter 1 for examples illustrating when property is placed in service.

What Is the Basis for Depreciation?

Terms you may need to know (see Glossary):

• Basis

The basis for depreciation of MACRS property is the property's cost or other basis multiplied by the percentage of business/investment use. For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing Activity in chapter 1. Reduce that amount by any credits and deductions allocable to the property. The following are examples of some credits and deductions that reduce basis.

• Any deduction for section 179 property.
• Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur regulations.
• Any deduction under section 179C of the Internal Revenue Code for certain qualified refinery property placed in service after August 8, 2005.
• Any deduction under section 179D of the Internal Revenue Code for certain energy efficient commercial building property placed in service after December 31, 2005.
• Any deduction under section 179E of the Internal Revenue Code for qualified advanced mine safety equipment property placed in service after December 20, 2006.
• Any deduction for removal of barriers to the disabled and the elderly.
• Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services.
• Any special depreciation allowance.
• Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code.

For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code.

Enter the basis for depreciation under column (c) in Part III of Form 4562. For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property in chapter 1.

Which Recovery Period Applies?

Terms you may need to know (see Glossary):

• Active conduct of a trade or business
• Basis
• Improvement
• Listed property
• Nonresidential real property
• Placed in service
• Property class
• Recovery period
• Residential rental property
• Section 1245 property

The recovery period of property is the number of years over which you recover its cost or other basis. It is determined based on the depreciation system (GDS or ADS) used.

Recovery Periods Under GDS

Under GDS, property that is not qualified Indian reservation property is depreciated over one of the following recovery periods.

 Property Class                Recovery Period
 ______________                _______________

 3-year property                   3 years¹
 5-year property                   5 years
 7-year property                   7 years
 10-year property                 10 years
 15-year property                 15 years²
 20-year property                 20 years
 25-year property                 25 years³
 Residential rental property    27.5 years
 Nonresidential real property     39 years⁴

FOOTNOTES TO TABLE

¹ 5 years for qualified rent-to-own property placed in
 service before August 6, 1997.

² 39 years for property that is a retail motor fuels
 outlet placed in service before August 20, 1996 (31.5 years if placed
 in service before May 13, 1993), unless you elected to depreciate it
 over 15 years.

³ 20 years for property placed in service before June
 13, 1996, or under a binding contract in effect before June 10, 1996.

⁴ 31.5 years for property placed in service before May
 13, 1993 (or before January 1, 1994, if the purchase or construction
 of the property is under a binding contract in effect before May 13,
 1993, or if construction began before May 13, 1993).

END OF FOOTNOTES TO TABLE

The GDS recovery periods for property not listed above can be found in Appendix B, Table of Class Lives and Recovery Periods. Residential rental property and nonresidential real property are defined earlier under Which Property Class Applies Under GDS.

Enter the appropriate recovery period on Form 4562 under column (d) in section B of Part III, unless already shown (for 25-year property, residential rental property, and nonresidential real property).

Office in the home. If your home is a personal-use single family residence and 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). However, if your home is an apartment in an apartment building that you own and the building is residential rental property as defined earlier under Which Property Class Applies Under GDS, depreciate the part used as an office as residential rental property over 27.5 years. See Publication 587 for a discussion of the tests you must meet to claim expenses, including depreciation, for the business use of your home.

Home changed to rental use. If you begin to rent a home that was your personal home before 1987, you depreciate it as residential rental property over 27.5 years.

Indian Reservation Property

The recovery periods for qualified property you placed in service on an Indian reservation after 1993 and before 2010 are shorter than those listed earlier. The following table shows these shorter recovery periods.

                               Recovery
 Property Class                 Period
 ______________                 ______

 3-year property                2 years
 5-year property                3 years
 7-year property                4 years
 10-year property               6 years
 15-year property               9 years
 20-year property              12 years
 Nonresidential real property  22 years

Nonresidential real property is defined earlier under Which Property Class Applies Under GDS.

Use this chart to find the correct percentage table to use for qualified Indian reservation property.

 _______________________________________________________
 IF your recovery period is:  THEN use the following
                              table in Appendix A:
 _______________________________________________________
 2 years                      A-21
 _______________________________________________________
 3 years                      A-1, A-2, A-3, A-4, or A-5
 _______________________________________________________
 4 years                      A-22
 _______________________________________________________
 6 years                      A-23
 _______________________________________________________
 9 years                      A-14, A-15, A-16, A-17, or
                              A-18
 _______________________________________________________
 12 years                     A-14, A-15, A-16, A-17, or
                              A-18
 _______________________________________________________
 22 years                     A-24
 _______________________________________________________

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. The rental of real property that is located on an Indian reservation is treated as the active conduct of a trade or business within an Indian reservation.

The following property is not qualified property.

1. Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property.

2. Property acquired directly or indirectly from a related person.

3. 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).

4. Any property you must depreciate under 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 for qualified business use (discussed in chapter 5).

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. For purposes of item (2) above, see Related persons in the discussion on property owned or used in 1986 under Which Method Can You Use To Depreciate Your Property in chapter 1 for a description of related persons.

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)). Section 3(d) of the Indian Financing Act of 1974 defines reservation to include former Indian reservations in Oklahoma. For a definition of the term "former Indian reservations in Oklahoma," see Notice 98-45 in Internal Revenue Bulletin 1998-35.

Recovery Periods Under ADS

The recovery periods for most property generally are longer under ADS than they are under GDS. The following table shows some of the ADS recovery periods.

                                                Recovery
 Property                                        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
 Natural gas gathering lines                    14 years
 Single purpose agricultural and horticultural
   structures                                   15 years
 Any tree or vine bearing fruit or nuts         20 years
 Initial clearing and grading land
   improvements for gas utility property        20 years
 Initial clearing and grading land
   improvements for electric utility
   transmission and distribution plants         25 years
 Electric transmission property used in the
   transmission at 69 or more kilovolts of
   electricity                                  30 years
 Natural gas distribution lines                 35 years
 Any qualified leasehold improvement
   property                                     39 years
 Any qualified restaurant property              39 years
 Nonresidential real property                   40 years
 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. Rent-to-own property, qualified leasehold improvement property, qualified restaurant property, residential rental property, and nonresidential real property are defined earlier under Which Property Class Applies Under GDS.

Tax-exempt use property subject to a lease. The ADS recovery period for any property leased under a lease agreement to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership) cannot be less than 125% of the lease term.

Additions and Improvements

An addition or improvement you make to depreciable property is treated as separate depreciable property. See How Do You Treat Repairs and Improvements in chapter 1 for a definition of improvements. Its property class and recovery period are the same as those that would apply to the original 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 in service the property to which you made the addition or improvement.

  CAUTION: If the improvement you make is qualified leasehold improvement property or qualified restaurant property (defined earlier under Which Property Class Applies Under GDS), the GDS recovery period is 15 years (39 years under ADS).

Example. You own a rental home that 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.

Which Convention Applies?

Terms you may need to know (see Glossary):

• Basis
• Convention
• Disposition
• Nonresidential real property
• Placed in service
• Recovery period
• Residential rental property

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.

The mid-month convention. Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel bore.

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.

Your use of the mid-month convention is indicated by the "MM" already shown under column (e) in Part III of Form 4562.

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, any railroad grading or tunnel bore, property placed in service and disposed of in the same year, and property that is being depreciated under a method other than MACRS) are more than 40% of the total depreciable bases of all MACRS property you placed in service during the entire 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 1 1/2 months of depreciation is allowed for the quarter the property is placed in service or disposed of.

If you use this convention, enter "MQ" under column (e) in Part III of Form 4562.

CAUTION:For purposes of determining whether the mid-quarter convention applies, the depreciable basis of property you placed in service during the tax year reflects the reduction in basis for amounts expensed under section 179 and the part of the basis of property attributable to personal use. However, it does not reflect any reduction in basis for any special depreciation allowance.

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.

If you use this convention, enter "HY" under column (e) in Part III of Form 4562.

Which Depreciation Method Applies?

Terms 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
• Tax exempt

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.

  CAUTION: For property placed in service before 1999, you could have elected 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.

Table 4-1 lists the types of property you can depreciate under each method. It also gives a brief explanation of the method, including any benefits that may apply.

Table 4-1. Depreciation Methods
 ______________________________________________________________________
 Note. The declining balance method is abbreviated as DB and the
 straight line method is abbreviated as SL.
 ______________________________________________________________________
    Method             Type of Property             Benefit
 ______________________________________________________________________
 GDS using 200%  o Nonfarm 3-, 5-, 7-, and  o Provides a greater
 DB                10-year property           deduction during the
                                              earlier recovery years

                                            o Changes to SL when that
                                              method provides an equal
                                              or greater deduction
 ______________________________________________________________________
 GDS using 150%  o All farm property        o Provides a greater
 DB                (except real property)     deduction during the
                                              earlier recovery years
                 o All 15- and 20-year
                   property (except         o Changes to SL when that
                   qualified leasehold        method provides an equal
                   improvement property       or greater deduction¹
                   and qualified
                   restaurant property
                   placed in service
                   before January 1, 2010)

                 o Nonfarm 3-, 5-, 7-, and
                   10-year property
 ______________________________________________________________________
 GDS using SL    o Nonresidential real      o Provides for equal yearly
                   property                   deductions (except for
                                              the first and last years)
                 o Qualified leasehold
                   improvement property
                   placed in service
                   before January 1, 2010

                 o Qualified restaurant
                   property placed in
                   service before January
                   1, 2010

                 o Residential rental
                   property

                 o Trees or vines bearing
                   fruit or nuts

                 o Water utility property

                 o All 3-, 5-, 7-, 10-,
                   15-, and 20-year
                   property²

                 o Property for which you
                   elected section
                   168(k)(4)
 ______________________________________________________________________
 ADS using SL    o Listed property used     o Provides for equal yearly
                   50% or less for            deductions
                   business

                 o Property used
                   predominantly outside
                   the U.S.

                 o Qualified leasehold
                   improvement property
                   placed in service
                   before January 1, 2010

                 o Qualified restaurant
                   property placed in
                   service before January
                   1, 2010

                 o Tax-exempt property

                 o Tax-exempt
                   bond-financed property

                 o Farm property used when
                   an election not to
                   apply the uniform
                   capitalization rules is
                   in effect

                 o Imported property³

                 o Any property for which
                   you elect to use this
                   method²
 ______________________________________________________________________

FOOTNOTES TO TABLE

¹ The MACRS percentage tables in Appendix A have the
 switch to the straight line method built into their rates

² See section 168(g)(7) of the Internal Revenue Code.

³ See section 168(g)(6) of the Internal Revenue Code

END OF FOOTNOTES TO TABLE

Depreciation Methods for Farm Property

If you place personal property in service in a farming business after 1988, you generally must depreciate it under GDS using the 150% declining balance method unless you are a farmer who must depreciate the property under ADS using the straight line method or you elect to depreciate the property under GDS or ADS using the straight line method. You can depreciate real property using the straight line method under either GDS or ADS.

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.

Electing a Different Method

As shown in Table 4-1, 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 still can make the election by filing an amended return within 6 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.

CAUTION: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 non-residential 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 III of Form 4562.

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 "S/L" under column (f) in Part III of Form 4562.

Election of ADS. 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 fixed ADS recovery periods. Most ADS recovery periods are listed in Appendix B, or see the table under Recovery Periods Under ADS, earlier.

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

Farm property. Instead of using the 150% declining balance method over a GDS recovery period for property you use in a farming business (other than real property), 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 an ADS recovery period.

How Is the Depreciation Deduction Figured?

Terms you may need to know (see Glossary):

• Adjusted basis
• Amortization
• Basis
• Business/investment use
• Convention
• Declining balance method
• Disposition
• Exchange
• Nonresidential real property
• Placed in service
• Property class
• Recovery period
• Straight line method

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 using a percentage table provided by the IRS, or you can figure it yourself without using the table.

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 near the end of this publication.

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 percentage tables immediately follow the guide.

Rules Covering the Use of 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.

2. You cannot use the percentage tables for a short tax year. See Figuring the Deduction for a Short Tax Year, later, for information on the short tax year rules.

3. Once you start using the percentage tables for any item of property, 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 --

a. Depreciation allowed or allowable, or

b. An addition or improvement to that property that is depreciated as a separate item of property.

Basis adjustments other than those made due to the items listed in (4) include an increase in basis for the recapture of a clean-fuel deduction or credit and a reduction in basis for a casualty loss.

Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. If you increase the basis of your property because of the recapture of part or all of a deduction for clean-fuel vehicles or the credit for clean-fuel vehicle refueling property placed in service before January 1, 2006, you cannot continue to use the percentage tables. For the year of the adjustment and the remaining recovery period, you must figure the depreciation deduction yourself using the property's adjusted basis at the end of the year. See Figuring the Deduction Without Using the Tables, later.

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, later.

Example. On October 26, 2008, Sandra Elm, a calendar year taxpayer, bought and placed in service in her business in the GO Zone a new item of 7-year property. It cost $39,000 and she elected a section 179 deduction of $24,000. She also took a special depreciation allowance of $7,500 [50% of $15,000 ($39,000 - $24,000)]. Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 - $7,500). She figured her MACRS depreciation deduction using the percentage tables. For 2008, her MACRS depreciation deduction was $268.

In July 2009, the property was vandalized and Sandra had a deductible casualty loss of $3,000. She must adjust the property's basis for the casualty loss, so she can no longer use the percentage tables. Her adjusted basis at the end of 2009, before figuring her 2009 depreciation, is $4,232. She figures that amount by subtracting the 2008 MACRS depreciation of $268 and the casualty loss of $3,000 from the unadjusted basis of $7,500. She must now figure her depreciation for 2009 without using the percentage tables.

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 you figure it without reducing your original basis by any MACRS depreciation taken in earlier years. However, you do reduce your original basis by other amounts, including the following.

• Any amortization taken on the property.
• Any section 179 deduction claimed.
• Any special depreciation allowance taken on the property.

For business property you purchase during the year, the unadjusted basis is its cost minus these and other applicable 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.

MACRS Worksheet

You can use this worksheet to help you figure your depreciation deduction using the percentage tables. Use a separate worksheet for each item of property. Then, use the information from this worksheet to prepare Form 4562.

CAUTION:Do not use this worksheet for automobiles. Use the Depreciation Worksheet for Passenger Automobiles in chapter 5.

MACRS Worksheet

                         Keep for Your Records
 ______________________________________________________________
                             Part I

  1. MACRS system (GDS or ADS)                    _____________
  2. Property class                               _____________
  3. Date placed in service                       _____________
  4. Recovery period                              _____________
  5. Method and 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
     other items                                          $
                                                          _____
 11. Subtract line 10 from line 9. This is your
     tentative basis for depreciation                     $
                                                          _____
 12. Multiply line 11 by .30 if the 30% special
     depreciation allowance applies. Multiply line
     11 by .50 if the 50% special depreciation
     allowance applies. This is your special
     depreciation allowance. Enter -0- if this is not
     the year you placed the property in service,
     the property is not qualified property, or you
     elected not to claim a special allowance             $
                                                          _____
 13. Subtract line 12 from line 11. This is your
     basis for depreciation                               _____
 14. Depreciation rate (from line 6)                      _____
 15. Multiply line 13 by line 14. This is your
     MACRS depreciation deduction                         $
                                                          =====
 ______________________________________________________________

FOOTNOTE TO TABLE

^* If real estate, do not include cost (basis) of land.

END OF FOOTNOTE TO TABLE

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, 2009. You use the furniture only for business. This is the only property you placed in service this year. You did not elect a section 179 deduction and the property is not qualified property for purposes of claiming a special depreciation allowance so your property's unadjusted basis is its cost, $10,000. You use GDS and the half-year convention to figure your depreciation. You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. 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

                         Keep for Your Records
 ______________________________________________________________
                             Part I

  1. MACRS system (GDS or ADS)                              GDS
                                               ________________

  2. Property class                                      7-year
                                               ________________

  3. Date placed in service                             8/11/09
                                               ________________

  4. Recovery period                                     7-Year
                                               ________________

  5. Method and convention                     200%DB/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 other items                                        -0-
                                                        _______

 11. Subtract line 10 from line 9. This is your
     tentative basis for depreciation                   $10,000
                                                        _______

 12. Multiply line 11 by .30 if the 30% special
     depreciation allowance applies. Multiply
     line 11 by .50 if the 50% special
     depreciation allowance applies. This is
     your special depreciation allowance.
     Enter -0- if this is not the year you
     placed the property in service, the
     property is not qualified property, or you
     elected not to claim a special allowance               -0-
                                                        _______

 13. Subtract line 12 from line 11. This is
     your basis for depreciation                        $10,000
                                                        _______
 14. Depreciation rate (from line 6)                      .1429
                                                        _______
 15. Multiply line 13 by line 14. This is your
     MACRS depreciation deduction                        $1,429
                                                        =======
 ______________________________________________________________

FOOTNOTE TO TABLE

^* If real estate, do not include cost (basis) of land.

END OF FOOTNOTE TO TABLE

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
 ____   _____   __________  _________

 2010  $10,000    24.49%      $2,449
 2011   10,000    17.49        1,749
 2012   10,000    12.49        1,249
 2013   10,000     8.93          893
 2014   10,000     8.92          892
 2015   10,000     8.93          893
 2016   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 that the building cost $100,000 and the land cost $20,000. It is nonresidential real property. The building's unadjusted basis is its original cost, $100,000.

You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. March is the third month of your tax year, so 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 the year, 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 and none of these items is qualified property for purposes of claiming a special depreciation allowance.

You placed property in service during the last three months of the year, so you must first determine if you have to use the mid-quarter convention. The total bases of all property you placed in service during the year is $10,000. The $5,000 basis of the computer, 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 the year. Therefore, 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. The machine is 7-year property placed in service in the first quarter, so you use Table A-2. The furniture is 7-year property placed in service in the third quarter, so 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    Basis  Percentage  Deduction
 ______________________________________________
 1st   Machine    $4,000     25.00      $1,000
 2nd   Machine     4,000     21.43         857
 ______________________________________________
 1st   Furniture   1,000     10.71         107
 2nd   Furniture   1,000     25.51         255
 ______________________________________________
 1st   Computer    5,000      5.00         250
 2nd   Computer    5,000     38.00       1,900
 ______________________________________________

Sale or Other Disposition Before the Recovery Period Ends

If you sell or otherwise dispose of your property before the end of its recovery period, your depreciation deduction for the year of the disposition will be only part of the depreciation amount for the full year. You have disposed of your property if you have permanently withdrawn it from use in your business or income-producing activity because of its sale, exchange, retirement, abandonment, involuntary conversion, or destruction. After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property.

Half-year convention used. For property for which you used a half-year convention, the depreciation deduction for the year of the disposition is half the depreciation determined for the full year.

Mid-quarter convention used. For property for which you used the mid-quarter convention, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter in which you disposed of the property.

 Quarter               Percentage
 _______               __________

 First                    12.5%
 Second                   37.5
 Third                    62.5
 Fourth                   87.5

Example. On December 2, 2006, you placed in service an item of 5-year property costing $10,000. You did not claim a section 179 deduction and the property does not qualify for a special depreciation allowance. Your unadjusted basis for the property was $10,000. You used the mid-quarter convention because this was the only item of business property you placed in service in 2006 and it was placed in service during the last 3 months of your tax year. Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. Your deductions for 2006, 2007, and 2008 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22.80% of $10,000). You disposed of the property on April 6, 2009. To determine your depreciation deduction for 2009, first figure the deduction for the full year. This is $1,368 (13.68% of $10,000). April is in the second quarter of the year, so you multiply $1,368 by 37.5% to get your depreciation deduction of $513 for 2009.

Mid-month convention used. If you dispose of residential rental or nonresidential real property, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by a fraction. The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. The denominator is 12.

Example. On July 2, 2007, you purchased and placed in service residential rental property. The property cost $100,000, not including the cost of land. You used Table A-6 to figure your MACRS depreciation for this property. You sold the property on March 2, 2009. You file your tax return based on the calendar year.

A full year of depreciation for 2009 is $3,636. This is $100,000 multiplied by .03636 (the percentage for the seventh month of the third recovery year) from Table A-6. You then apply the mid-month convention for the 2 1/2 months of use in 2009. Treat the month of disposition as one-half month of use. Multiply $3,636 by the fraction, 2.5 over 12, to get your 2009 depreciation deduction of $757.50.

Figuring the Deduction Without Using the Tables

Instead of using the rates in the percentage tables to figure your depreciation deduction, you can figure it yourself. Before making the computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year.

CAUTION:Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables.

Declining Balance Method

When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. You must use the applicable convention for the first tax year and you must switch to the straight line method beginning in the first year for which it will give an equal or greater deduction. The straight line method is explained later.

You figure depreciation for the year you place property in service as follows.

1. Multiply your adjusted basis in the property by the declining balance rate.

2. Apply the applicable convention.

You figure depreciation for all other years (before the year you switch to the straight line method) as follows.

1. Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years.

2. Multiply this new adjusted basis by the same declining balance rate used in earlier years.

If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to figure depreciation for the year you dispose of it.

Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1, later, under Examples.

Declining balance rate. You figure your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of years in the property's recovery period. For example, for 3-year property depreciated using the 200% declining balance method, divide 2.00 (200%) by 3 to get 0.6667, or a 66.67% declining balance rate. For 15-year property depreciated using the 150% declining balance method, divide 1.50 (150%) by 15 to get 0.10, or a 10% declining balance rate.

The following table shows the declining balance rate for each property class and the first year for which the straight line method gives an equal or greater deduction.

 __________________________________________
 Property           Declining Balance
 Class     Method         Rate         Year
 __________________________________________
 3-year    200% DB        66.667%       3rd
 __________________________________________
 5-year    200% DB        40.0          4th
 __________________________________________
 7-year    200% DB        28.571        5th
 __________________________________________
 10-year   200% DB        20.0          7th
 __________________________________________
 15-year   150% DB        10.0          7th
 __________________________________________
 20-year   150% DB         7.5          9th
 __________________________________________

Straight Line Method

When using the straight line method, you apply a different depreciation rate each year to the adjusted basis of your property. You must use the applicable convention in the year you place the property in service and the year you dispose of the property.

You figure depreciation for the year you place property in service as follows.

1. Multiply your adjusted basis in the property by the straight line rate.

2. Apply the applicable convention.

You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows.

1. Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method).

2. Determine the depreciation rate for the year.

3. Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2).

If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to figure depreciation for the year you dispose of it.

Straight line rate. You determine the straight line depreciation rate for any tax year by dividing the number 1 by the years remaining in the recovery period at the beginning of that year. When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. If the number of years remaining is less than 1, the depreciation rate for that tax year is 1.0 (100%).

Using the Applicable Convention

The applicable convention (discussed earlier under Which Convention Applies) affects how you figure your depreciation deduction for the year you place your property in service and for the year you dispose of it. It determines how much of the recovery period remains at the beginning of each year, so it also affects the depreciation rate for property you depreciate under the straight line method. See Straight line rate in the previous discussion. Use the applicable convention as explained in the following discussions.

Half-year convention. If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. You deduct a full year of depreciation for any other year during the recovery period.

Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final 6 months of the recovery period is the amount of your unrecovered basis in the property.

Mid-quarter convention. If this convention applies, the depreciation you can deduct for the first year you depreciate the property depends on the quarter in which you place the property in service.

A quarter of a full 12-month tax year is a period of 3 months. The first quarter in a year begins on the first day of the tax year. The second quarter begins on the first day of the fourth month of the tax year. The third quarter begins on the first day of the seventh month of the tax year. The fourth quarter begins on the first day of the tenth month of the tax year. A calendar year is divided into the following quarters.

 Quarter          Months
 _______          ______

 First       January, February, March
 Second              April, May, June
 Third        July, August, September
 Fourth   October, November, December

Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by the percentage listed below for the quarter you place the property in service.

 Quarter               Percentage
 _______               __________

 First                    87.5%
 Second                   62.5
 Third                    37.5
 Fourth                   12.5

If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter you dispose of the property.

 Quarter               Percentage
 _______               __________

 First                    12.5%
 Second                   37.5
 Third                    62.5
 Fourth                   87.5

If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final quarter of the recovery period is the amount of your unrecovered basis in the property.

Mid-month convention. If this convention applies, the depreciation you can deduct for the first year that you depreciate the property depends on the month in which you place the property in service. Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by a fraction. The numerator of the fraction is the number of full months in the year that the property is in service plus 1/2 (or 0.5). The denominator is 12.

If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final month of the recovery period is the amount of your unrecovered basis in the property.

Example. You use the calendar year and place non-residential real property in service in August. The property is in service 4 full months (September, October, November, and December). Your numerator is 4.5 (4 full months plus 0.5). You multiply the depreciation for a full year by 4.5/12, or 0.375.

Examples

The following examples show how to figure depreciation under MACRS without using the percentage tables. Figures are rounded for purposes of the examples. Assume for all the examples that you use a calendar year as your tax year.

Example 1 -- 200% DB method and half-year convention. In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. You do not elect to take the section 179 deduction and the property does not qualify for a special depreciation allowance. You use GDS and the 200% declining balance (DB) method to figure your depreciation. When the straight line (SL) method results in an equal or larger deduction, you switch to the SL method. You did not place any property in service in the last 3 months of the year, so you must use the half-year convention.

First year. You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery period). The result is 40%. You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. You apply the half-year convention by dividing the result ($400) by 2. Depreciation for the first year under the 200% DB method is $200.

You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. The result is 20%.You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. You apply the half-year convention by dividing the result ($200) by 2. Depreciation for the first year under the SL method is $100.

The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method.

Second year. You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). You multiply the result ($800) by the DB rate (40%). Depreciation for the second year under the 200% DB method is $320.

You figure the SL depreciation rate by dividing 1 by 4.5, the number of years remaining in the recovery period. (Based on the half-year convention, you used only half a year of the recovery period in the first year.) You multiply the reduced adjusted basis ($800) by the result (22.22%). Depreciation under the SL method for the second year is $178.

The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method.

Third year. You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). You multiply the result ($480) by the DB rate (40%). Depreciation for the third year under the 200% DB method is $192.

You figure the SL depreciation rate by dividing 1 by 3.5. You multiply the reduced adjusted basis ($480) by the result (28.57%). Depreciation under the SL method for the third year is $137.

The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method.

Fourth year. You reduce the adjusted basis ($480) by the depreciation claimed in the third year ($192). You multiply the result ($288) by the DB rate (40%). Depreciation for the fourth year under the 200% DB method is $115.

You figure the SL depreciation rate by dividing 1 by 2.5. You multiply the reduced adjusted basis ($288) by the result (40%). Depreciation under the SL method for the fourth year is $115.

The SL method provides an equal deduction, so you switch to the SL method and deduct the $115.

Fifth year. You reduce the adjusted basis ($288) by the depreciation claimed in the fourth year ($115) to get the reduced adjusted basis of $173. You figure the SL depreciation rate by dividing 1 by 1.5. You multiply the reduced adjusted basis ($173) by the result (66.67%). Depreciation under the SL method for the fifth year is $115.

Sixth year. You reduce the adjusted basis ($173) by the depreciation claimed in the fifth year ($115) to get the reduced adjusted basis of $58. There is less than one year remaining in the recovery period, so the SL depreciation rate for the sixth year is 100%. You multiply the reduced adjusted basis ($58) by 100% to arrive at the depreciation deduction for the sixth year ($58).

Example 2 -- SL method and mid-month convention. In January, you bought and placed in service a building for $100,000 that is nonresidential real property with a recovery period of 39 years. The adjusted basis of the building is its cost of $100,000. You use GDS, the straight line (SL) method, and the mid-month convention to figure your depreciation.

First year. You figure the SL depreciation rate for the building by dividing 1 by 39 years. The result is .02564. The depreciation for a full year is $2,564 ($100,000 x .02564). Under the mid-month convention, you treat the property as placed in service in the middle of January. You get 11.5 months of depreciation for the year. Expressed as a decimal, the fraction of 11.5 months divided by 12 months is.958. Your first-year depreciation for the building is $2,456 ($2,564 x .958).

Second year. You subtract $2,456 from $100,000 to get your adjusted basis of $97,544 for the second year. The SL rate is .02629. This is 1 divided by the remaining recovery period of 38.042 years (39 years reduced by 11.5 months or .958 year). Your depreciation for the building for the second year is $2,564 ($97,544 x .02629).

Third year. The adjusted basis is $94,980 ($97,544 - $2,564). The SL rate is .027 (1 divided by 37.042 remaining years). Your depreciation for the third year is $2,564 ($94,980 x .027).

Example 3 -- 200% DB method and mid-quarter convention. During the year, you bought and placed in service in your business the following items.

 ____________________________________________________
                                 Month Placed
 Item                            in Service      Cost
 ____________________________________________________
 Safe                            January       $4,000
 ____________________________________________________
 Office furniture                September      1,000
 ____________________________________________________
 Computer (not listed property)  October        5,000
 ____________________________________________________

You do not elect a section 179 deduction and these items do not qualify for a special depreciation allowance. You use GDS and the 200% declining balance (DB) method to figure the depreciation. The total bases of all property you placed in service this year is $10,000. The basis of the computer ($5,000) is more than 40% of the total bases of all property placed in service during the year ($10,000), so you must use the mid-quarter convention. This convention applies to all three items of property. The safe and office furniture are 7-year property and the computer is 5-year property.

First and second year depreciation for safe. The 200% DB rate for 7-year property is .28571. You determine this by dividing 2.00 (200%) by 7 years. The depreciation for the safe for a full year is $1,143 ($4,000 x .28571). You placed the safe in service in the first quarter of your tax year, so you multiply $1,143 by 87.5% (the mid-quarter percentage for the first quarter). The result, $1,000, is your deduction for depreciation on the safe for the first year.

For the second year, the adjusted basis of the safe is $3,000. You figure this by subtracting the first year's depreciation ($1,000) from the basis of the safe ($4,000). Your depreciation deduction for the second year is $857 ($3,000 x .28571).

First and second year depreciation for furniture. The furniture is also 7-year property, so you use the same 200% DB rate of .28571. You multiply the basis of the furniture ($1,000) by .28571 to get the depreciation of $286 for the full year. You placed the furniture in service in the third quarter of your tax year, so you multiply $286 by 37.5% (the mid-quarter percentage for the third quarter). The result, $107, is your deduction for depreciation on the furniture for the first year.

For the second year, the adjusted basis of the furniture is $893. You figure this by subtracting the first year's depreciation ($107) from the basis of the furniture ($1,000). Your depreciation for the second year is $255 ($893 x .28571).

First and second year depreciation for computer. The 200% DB rate for 5-year property is .40. You determine this by dividing 2.00 (200%) by 5 years. The depreciation for the computer for a full year is $2,000 ($5,000 x.40). You placed the computer in service in the fourth quarter of your tax year, so you multiply the $2,000 by 12.5% (the mid-quarter percentage for the fourth quarter). The result, $250, is your deduction for depreciation on the computer for the first year.

For the second year, the adjusted basis of the computer is $4,750. You figure this by subtracting the first year's depreciation ($250) from the basis of the computer ($5,000). Your depreciation deduction for the second year is $1,900 ($4,750 x .40).

Example 4 -- 200% DB method and half-year convention. Last year, in July, you bought and placed in service in your business a new item of 7-year property. This was the only item of property you placed in service last year. The property cost $39,000 and you elected a $24,000 section 179 deduction. You also took a special depreciation allowance of $7,500. Your unadjusted basis for the property is $7,500. Because you did not place any property in service in the last 3 months of your tax year, you used the half-year convention. You figured your deduction using the percentages in Table A-1 for 7-year property. Last year, your depreciation was $1,072 ($7,500 x 14.29%).

In July of this year, your property was vandalized. You had a deductible casualty loss of $3,000. You spent $3,500 to put the property back in operational order. Your adjusted basis at the end of this year is $6,928. You figured this by first subtracting the first year's depreciation ($1,072) and the casualty loss ($3,000) from the unadjusted basis of $7,500. To this amount ($3,428), you then added the $3,500 repair cost.

You cannot use the table percentages to figure your depreciation for this property for this year because of the adjustments to basis. You must figure the deduction yourself. You determine the DB rate by dividing 2.00 (200%) by 7 years. The result is .28571 or 28.571%. You multiply the adjusted basis of your property ($6,928) by the declining balance rate of .28571 to get your depreciation deduction of $1,979 for this year.

Figuring the Deduction for Property Acquired in a Nontaxable Exchange

If your property has a carryover basis because you acquired it in a nontaxable transfer such as a like-kind exchange or involuntary conversion, you must generally figure depreciation for the property as if the transfer had not occurred. However, see Like-kind exchanges and involuntary conversions, earlier, in chapter 3 under How Much Can You Deduct and Property Acquired in a Like-kind Exchange or Involuntary Conversion, next.

Property Acquired in a Like-kind Exchange or Involuntary Conversion

You generally must depreciate the carryover basis of property acquired in a like-kind exchange or involuntary conversion over the remaining recovery period of the property exchanged or involuntarily converted. You also generally continue to use the same depreciation method and convention used for the exchanged or involuntarily converted property. This applies only to acquired property with the same or a shorter recovery period and the same or more accelerated depreciation method than the property exchanged or involuntarily converted. The excess basis (the part of the acquired property's basis that exceeds its carryover basis), if any, of the acquired property is treated as newly placed in service property.

For acquired property that has a longer recovery period or less accelerated depreciation method than the exchanged or involuntarily converted property, you generally must depreciate the carryover basis of the acquired property as if it were placed in service in the same tax year as the exchanged or involuntarily converted property. You also generally continue to use the longer recovery period and less accelerated depreciation method of the acquired property.

If the MACRS property you acquired in the exchange or involuntary conversion is qualified property, discussed earlier in chapter 3 under What Is Qualified Property, you can claim a special depreciation allowance on the carryover basis.

Special rules apply to vehicles acquired in a trade-in. For information on how to figure depreciation for a vehicle acquired in a trade-in that is subject to the passenger automobile limits, see Deductions For Passenger Automobiles Acquired in a Trade-in under Do the Passenger Automobile Limits Apply in chapter 5.

Election out. Instead of using the above rules, you can elect, for depreciation purposes, to treat the adjusted basis of the exchanged or involuntarily converted property as if disposed of at the time of the exchange or involuntary conversion. Treat the carryover basis and excess basis, if any, for the acquired property as if placed in service the later of the date you acquired it or the time of the disposition of the exchanged or involuntarily converted property. The depreciable basis of the new property is the adjusted basis of the exchanged or involuntarily converted property plus any additional amount you paid for it. The election, if made, applies to both the acquired property and the exchanged or involuntarily converted property. This election does not affect the amount of gain or loss recognized on the exchange or involuntary conversion.

When to make the election. You must make the election on a timely filed return (including extensions) for the year of replacement. The election must be made separately by each person acquiring replacement property. In the case of a partnership, S corporation, or consolidated group, the election is made by the partnership, by the S corporation, or by the common parent of a consolidated group, respectively. Once made, the election may not be revoked without IRS consent.

For more information and special rules, see the Instructions for Form 4562.

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 that exceeds its carryover basis (the transferor's adjusted basis in the property) as newly purchased MACRS property.

The nontaxable transfers covered by this rule include the following.

• A distribution in complete liquidation of a subsidiary.
• A transfer to a corporation controlled by the transferor.
• An exchange of property solely for corporate stock or securities in a reorganization.
• A contribution of property to a partnership in exchange for a partnership interest.
• A partnership distribution of property to a partner.

Figuring the Deduction for a Short Tax Year

You cannot use the MACRS percentage tables to determine depreciation for a short tax year. A short tax year is any tax year with less than 12 full months. This section discusses the rules for determining the depreciation deduction for property you place in service or dispose of in a short tax year. It also discusses the rules for determining depreciation when you have a short tax year during the recovery period (other than the year the property is placed in service or disposed of).

For more information on figuring depreciation for a short tax year, see Revenue Procedure 89-15, 1989-1 C.B. 816.

Using the Applicable Convention in a Short Tax Year

The applicable convention establishes the date property is treated as placed in service and disposed of. Depreciation is allowable only for that part of the tax year the property is treated as in service. The recovery period begins on the placed in service date determined by applying the convention. The remaining recovery period at the beginning of the next tax year is the full recovery period less the part for which depreciation was allowable in the first tax year.

The following discussions explain how to use the applicable convention in a short tax year.

Mid-month convention. Under the mid-month convention, you always treat your property as placed in service or disposed of on the midpoint of the month it is placed in service or disposed of. You apply this rule without regard to your tax year.

Half-year convention. Under the half-year convention, you treat property as placed in service or disposed of on the midpoint of the tax year it is placed in service or disposed of.

First or last day of month. For a short tax year beginning on the first day of a month or ending on the last day of a month, the tax year consists of the number of months in the tax year. If the short tax year includes part of a month, you generally include the full month in the number of months in the tax year. You determine the midpoint of the tax year by dividing the number of months in the tax year by 2. For the half-year convention, you treat property as placed in service or disposed of on either the first day or the midpoint of a month.

For example, a short tax year that begins on June 20 and ends on December 31 consists of 7 months. You use only full months for this determination, so you treat the tax year as beginning on June 1 instead of June 20. The midpoint of the tax year is the middle of September (3 1/2 months from the beginning of the tax year). You treat property as placed in service or disposed of on this mid-point.

Example. Tara Corporation, a calendar year taxpayer, was incorporated on March 15. For purposes of the half-year convention, it has a short tax year of 10 months, ending on December 31, 2009. During the short tax year, Tara placed property in service for which it uses the half-year convention. Tara treats this property as placed in service on the first day of the sixth month of the short tax year, or August 1, 2009.

Not on first or last day of month. For a short tax year not beginning on the first day of a month and not ending on the last day of a month, the tax year consists of the number of days in the tax year. You determine the midpoint of the tax year by dividing the number of days in the tax year by 2. For the half-year convention, you treat property as placed in service or disposed of on either the first day or the midpoint of a month. If the result of dividing the number of days in the tax year by 2 is not the first day or the midpoint of a month, you treat the property as placed in service or disposed of on the nearest preceding first day or midpoint of a month.

Mid-quarter convention. To determine if you must use the mid-quarter convention, compare the basis of property you place in service in the last 3 months of your tax year to that of property you place in service during the full tax year. The length of your tax year does not matter. If you have a short tax year of 3 months or less, use the mid-quarter convention for all applicable property you place in service during that tax year.

You treat property under the mid-quarter convention as placed in service or disposed of on the midpoint of the quarter of the tax year in which it is placed in service or disposed of. Divide a short tax year into 4 quarters and determine the midpoint of each quarter.

For a short tax year of 4 or 8 full calendar months, determine quarters on the basis of whole months. The midpoint of each quarter is either the first day or the midpoint of a month. Treat property as placed in service or disposed of on this midpoint.

To determine the midpoint of a quarter for a short tax year of other than 4 or 8 full calendar months, complete the following steps.

1. Determine the number of days in your short tax year.

2. Determine the number of days in each quarter by dividing the number of days in your short tax year by 4.

3. Determine the midpoint of each quarter by dividing the number of days in each quarter by 2.

If the result of (3) gives you a midpoint of a quarter that is on a day other than the first day or midpoint of a month, treat the property as placed in service or disposed of on the nearest preceding first day or midpoint of that month.

Example. Tara Corporation, a calendar year taxpayer, was incorporated and began business on March 15. It has a short tax year of 9 1/2 months, ending on December 31. During December, it placed property in service for which it must use the mid-quarter convention. This is a short tax year of other than 4 or 8 full calendar months, so it must determine the midpoint of each quarter.

1. First, it determines that its short tax year beginning March 15 and ending December 31 consists of 292 days.

2. Next, it divides 292 by 4 to determine the length of each quarter, 73 days.

3. Finally, it divides 73 by 2 to determine the midpoint of each quarter, the 37th day.

The following table shows the quarters of Tara Corporation's short tax year, the midpoint of each quarter, and the date in each quarter that Tara must treat its property as placed in service.

 ____________________________________________
 Quarter         Midpoint   Placed in Service
 ____________________________________________
 3/15 - 5/26        4/20           4/15
 ____________________________________________
 5/27 - 8/07        7/02           7/01
 ____________________________________________
 8/08 - 10/19       9/13           9/01
 ____________________________________________
 10/20 - 12/31     11/25          11/15
 ____________________________________________

The last quarter of the short tax year begins on October 20, which is 73 days from December 31, the end of the tax year. The 37th day of the last quarter is November 25, which is the midpoint of the quarter. November 25 is not the first day or the midpoint of November, so Tara Corporation must treat the property as placed in service in the middle of November (the nearest preceding first day or midpoint of that month).

Property Placed in Service in a Short Tax Year

To figure your MACRS depreciation deduction for the short tax year, you must first determine the depreciation for a full tax year. You do this by multiplying your basis in the property by the applicable depreciation rate. Then, determine the depreciation for the short tax year. Do this by multiplying the depreciation for a full tax year by a fraction. The numerator (top number) of the fraction is the number of months (including parts of a month) the property is treated as in service during the tax year (applying the applicable convention). The denominator (bottom number) is 12. See Depreciation After a Short Tax Year, later, for information on how to figure depreciation in later years.

Example 1 -- half-year convention. Tara Corporation, with a short tax year beginning March 15 and ending December 31, placed in service on March 16 an item of 5-year property with a basis of $1,000. This is the only property the corporation placed in service during the short tax year. Tara does not elect to claim a section 179 deduction and the property does not qualify for a special depreciation allowance. The depreciation method for this property is the 200% declining balance method. The depreciation rate is 40% and Tara applies the half-year convention.

Tara treats the property as placed in service on August 1. The determination of this August 1 date is explained in the example illustrating the half-year convention under Using the Applicable Convention in a Short Tax Year, earlier. Tara is allowed 5 months of depreciation for the short tax year that consists of 10 months. The corporation first multiplies the basis ($1,000) by 40% (the declining balance rate) to get the depreciation for a full tax year of $400. The corporation then multiplies $400 by 5/12 to get the short tax year depreciation of $167.

Example 2 -- mid-quarter convention. Tara Corporation, with a short tax year beginning March 15 and ending on December 31, placed in service on October 16 an item of 5-year property with a basis of $1,000. Tara does not elect to claim a section 179 deduction and the property does not qualify for a special depreciation allowance. The depreciation method for this property is the 200% declining balance method. The depreciation rate is 40%. The corporation must apply the mid-quarter convention because the property was the only item placed in service that year and it was placed in service in the last 3 months of the tax year.

Tara treats the property as placed in service on September 1. This date is shown in the table provided in the example illustrating the mid-quarter convention under Using the Applicable Convention in a Short Tax Year, earlier, for property that Tara Corporation placed in service during the quarter that begins on August 8 and ends on October 19. Under MACRS, Tara is allowed 4 months of depreciation for the short tax year that consists of 10 months. The corporation first multiplies the basis ($1,000) by 40% to get the depreciation for a full tax year of $400. The corporation then multiplies $400 by 4/12 to get the short tax year depreciation of $133.

Property Placed in Service Before a Short Tax Year

If you have a short tax year after the tax year in which you began depreciating property, you must change the way you figure depreciation for that property. If you were using the percentage tables, you can no longer use them. You must figure depreciation for the short tax year and each later tax year as explained next.

Depreciation After a Short Tax Year

You can use either of the following methods to figure the depreciation for years after a short tax year.

• The simplified method.
• The allocation method.

You must use the method you choose consistently.

Using the simplified method for a 12-month year. Under the simplified method, you figure the depreciation for a later 12-month year in the recovery period by multiplying the adjusted basis of your property at the beginning of the year by the applicable depreciation rate.

Example. Assume the same facts as in Example 1 under Property Placed in Service in a Short Tax Year, earlier. The Tara Corporation claimed depreciation of $167 for its short tax year. The adjusted basis on January 1 of the next year is $833 ($1,000 - $167). Tara's depreciation for that next year is 40% of $833, or $333.

Using the simplified method for a short year. If a later tax year in the recovery period is a short tax year, you figure depreciation for that year by multiplying the adjusted basis of the property at the beginning of the tax year by the applicable depreciation rate, and then by a fraction. The fraction's numerator is the number of months (including parts of a month) in the tax year. Its denominator is 12.

Using the simplified method for an early disposition. If you dispose of property in a later tax year before the end of the recovery period, determine the depreciation for the year of disposition by multiplying the adjusted basis of the property at the beginning of the tax year by the applicable depreciation rate and then multiplying the result by a fraction. The fraction's numerator is the number of months (including parts of a month) the property is treated as in service during the tax year (applying the applicable convention). Its denominator is 12.

Using the allocation method for a 12-month or short tax year. Under the allocation method, you figure the depreciation for each later tax year by allocating to that year the depreciation attributable to the parts of the recovery years that fall within that year. Whether your tax year is a 12-month or short tax year, you figure the depreciation by determining which recovery years are included in that year. For each recovery year included, multiply the depreciation attributable to that recovery year by a fraction. The fraction's numerator is the number of months (including parts of a month) that are included in both the tax year and the recovery year. Its denominator is 12. The allowable depreciation for the tax year is the sum of the depreciation figured for each recovery year.

Example. Assume the same facts as in Example 1 under Property Placed in Service in a Short Tax Year, earlier. The Tara Corporation's first tax year after the short tax year is a full year of 12 months, beginning January 1 and ending December 31. The first recovery year for the 5-year property placed in service during the short tax year extends from August 1 to July 31. Tara deducted 5 months of the first recovery year on its short-year tax return. Seven months of the first recovery year and 5 months of the second recovery year fall within the next tax year. The depreciation for the next tax year is $333, which is the sum of the following.

• $233 -- The depreciation for the first recovery year ($400 x 7/12).
• $100 -- The depreciation for the second recovery year. This is figured by multiplying the adjusted basis of $600 ($1,000 - $400) by 40%, then multiplying the $240 result by 5/12.

Using the allocation method for an early disposition. If you dispose of property before the end of the recovery period in a later tax year, determine the depreciation for the year of disposition by multiplying the depreciation figured for each recovery year or part of a recovery year included in the tax year by a fraction. The numerator of the fraction is the number of months (including parts of months) the property is treated as in service in the tax year (applying the applicable convention). The denominator is 12. If there is more than one recovery year in the tax year, you add together the depreciation for each recovery year.

How Do You Use General Asset Accounts?

Terms you may need to know (see Glossary):

• Adjusted basis
• Amortization
• Amount realized
• Basis
• Convention
• Disposition
• Exchange
• Placed in service
• Recovery period
• Section 1245 property
• Unadjusted basis

To make it easier to figure MACRS depreciation, you can group separate properties into one or more general asset accounts (GAAs). You then can depreciate all the properties in each account as a single item of property.

Property you cannot include. You cannot include property in a GAA if you use it in both a personal activity and a trade or business (or for the production of income) in the year in which you first place it in service. If property you included in a GAA is later used in a personal activity, see Terminating GAA Treatment, later.

Property generating foreign source income. For information on the GAA treatment of property that generates foreign source income, see sections 1.168(i)-1(f) of the regulations.

Change in use. Special rules apply to figuring depreciation for property in a GAA for which the use changes during the tax year. Examples include a change in use resulting in a shorter recovery period and/or more accelerated depreciation method or a change in use resulting in a longer recovery period and/or a less accelerated depreciation method. See sections 1.168(i)-1(h) and 1.168(i)-4 of the regulations.

Grouping Property

Each GAA must include only property you placed in service in the same year and that has the following in common.

• Asset class, if any.
• Recovery period.
• Depreciation method.
• Convention.

The following rules also apply when you establish a GAA.

• No asset class. Properties without an asset class, but with the same depreciation method, recovery period, and convention, can be grouped into the same GAA.
• Mid-quarter convention. Property subject to the mid-quarter convention can only be grouped into a GAA with property placed in service in the same quarter of the tax year.
• Mid-month convention. Property subject to the mid-month convention can only be grouped into a GAA with property placed in service in the same month of the tax year.
• Passenger automobiles. Passenger automobiles subject to the limits on passenger automobile depreciation must be grouped into a separate GAA.

Figuring Depreciation for a GAA

After you have set up a GAA, you generally figure the MACRS depreciation for it by using the applicable depreciation method, recovery period, and convention for the property in the GAA. For each GAA, record the depreciation allowance in a separate depreciation reserve account.

Example. Make & Sell, a calendar-year corporation, set up a GAA for ten machines. The machines cost a total of $10,000 and were placed in service in June 2009. One of the machines cost $8,200 and the rest cost a total of $1,800. This GAA is depreciated under the 200% declining balance method with a 5-year recovery period and a half-year convention. Make & Sell did not claim the section 179 deduction on the machines and the machines did not qualify for a special depreciation allowance. The depreciation allowance for 2009 is $2,000 [($10,000 x 40%) ÷ 2]. As of January 1, 2010, the depreciation reserve account is $2,000.

Passenger automobiles. To figure depreciation on passenger automobiles in a GAA, apply the deduction limits discussed in chapter 5 under Do the Passenger Automobile Limits Apply. Multiply the amount determined using these limits by the number of automobiles originally included in the account, reduced by the total number of automobiles removed from the GAA as discussed in Terminating GAA Treatment, later.

Disposing of GAA Property

When you dispose of property included in a GAA, the following rules generally apply.

• Neither the unadjusted depreciable basis (defined later) nor the depreciation reserve account of the GAA is affected. You continue to depreciate the account as if the disposition had not occurred.
• The property is treated as having an adjusted basis of zero, so you cannot realize a loss on the disposition. If the property is transferred to a supplies, scrap, or similar account, its basis in that account is zero.
• Any amount realized on the disposition is treated as ordinary income, up to the limit discussed later under Treatment of amount realized.

However, these rules do not apply to any disposition described later under Terminating GAA Treatment.

Disposition. Property in a GAA is considered disposed of when you do any of the following.

• Permanently withdraw it from use in your trade or business or from the production of income.
• Transfer it to a supplies, scrap, or similar account.
• Sell, exchange, retire, physically abandon, or destroy it.

The retirement of a structural component of real property is not a disposition.

Treatment of amount realized. When you dispose of property in a GAA, you must recognize any amount realized from the disposition as ordinary income, up to a limit. The limit is:

1. The unadjusted depreciable basis of the GAA plus

2. Any expensed costs for property in the GAA that are subject to recapture as depreciation (not including any expensed costs for property that you removed from the GAA under the rules discussed later under Terminating GAA Treatment), minus

3. Any amount previously recognized as ordinary income upon the disposition of other property from the GAA.

Unadjusted depreciable basis. The unadjusted depreciable basis of a GAA is the total of the unadjusted depreciable bases of all the property in the GAA. The unadjusted depreciable basis of an item of property in a GAA is the amount you would use to figure gain or loss on its sale, but figured without reducing your original basis by any depreciation allowed or allowable in earlier years. However, you do reduce your original basis by other amounts, including any amortization deduction, section 179 deduction, special depreciation allowance, and electric vehicle credit.

Expensed costs. Expensed costs that are subject to recapture as depreciation include the following.

1. The section 179 deduction.

2. Amortization deductions for the following.

a. Pollution control facilities.

b. Removal of barriers for the elderly and disabled.

c. Tertiary injectants.

d. Reforestation expenses.

Example 1. The facts are the same as in the example under Figuring Depreciation for a GAA, earlier. In February 2010, Make & Sell sells the machine that cost $8,200 to an unrelated person for $9,000. The machine is treated as having an adjusted basis of zero.

On its 2010 tax return, Make & Sell recognizes the $9,000 amount realized as ordinary income because it is not more than the GAA's unadjusted depreciable basis ($10,000) plus any expensed cost (for example, the section 179 deduction) for property in the GAA ($0), minus any amounts previously recognized as ordinary income because of dispositions of other property from the GAA ($0).

The unadjusted depreciable basis and depreciation reserve of the GAA are not affected by the sale of the machine. The depreciation allowance for the GAA in 2010 is $3,200 [($10,000 - $2,000) x 40%].

Example 2. Assume the same facts as in Example 1. In June 2011, Make & Sell sells seven machines to an unrelated person for a total of $1,100. These machines are treated as having an adjusted basis of zero.

On its 2011 tax return, Make & Sell recognizes $1,000 as ordinary income. This is the GAA's unadjusted depreciable basis ($10,000) plus the expensed costs ($0), minus the amount previously recognized as ordinary income ($9,000). The remaining amount realized of $100 ($1,100 - $1,000) is section 1231 gain (discussed in chapter 3 of Publication 544).

The unadjusted depreciable basis and depreciation reserve of the GAA are not affected by the disposition of the machines. The depreciation allowance for the GAA in 2011 is $1,920 [($10,000 - $5,200) x 40%].

Terminating GAA Treatment

You must remove the following property from a GAA.

• Property you dispose of in a nonrecognition transaction or an abusive transaction.
• Property you dispose of in a qualifying disposition or in a disposition of all the property in the GAA, if you choose to terminate GAA treatment.
• Property you dispose of in a like-kind exchange or an involuntary conversion.
• Property you change to personal use.
• Property for which you must recapture any allowable credit or deduction, such as the investment credit, the credit for qualified electric vehicles, the section 179 deduction, or the deduction for clean-fuel vehicles and clean-fuel vehicle refueling property placed in service before January 1, 2006.

If you remove property from a GAA, you must make the following adjustments.

1. Reduce the unadjusted depreciable basis of the GAA by the unadjusted depreciable basis of the property as of the first day of the tax year in which the disposition, change in use, or recapture event occurs. You can use any reasonable method that is consistently applied to determine the unadjusted depreciable basis of the property you remove from a GAA.

2. Reduce the depreciation reserve account by the depreciation allowed or allowable for the property (computed in the same way as computed for the GAA) as of the end of the tax year immediately preceding the year in which the disposition, change in use, or recapture event occurs.

These adjustments have no effect on the recognition and character of prior dispositions subject to the rules discussed earlier under Disposing of GAA Property.

Nonrecognition transactions. If you dispose of GAA property in a nonrecognition transaction, you must remove it from the GAA. The following are nonrecognition transactions.

• The receipt by one corporation of property distributed in complete liquidation of another corporation.
• The transfer of property to a corporation solely in exchange for stock in that corporation if the transferor is in control of the corporation immediately after the exchange.
• The transfer of property by a corporation that is a party to a reorganization in exchange solely for stock and securities in another corporation that is also a party to the reorganization.
• The contribution of property to a partnership in exchange for an interest in the partnership.
• The distribution of property (including money) from a partnership to a partner.
• Any transaction between members of the same affiliated group during any year for which the group makes a consolidated return.

Rules for recipient (transferee). The recipient of the property (the person to whom it is transferred) must include your (the transferor's) adjusted basis in the property in a GAA. If you transferred either all of the property or the last item of property in a GAA, the recipient's basis in the property is the result of the following.

• The adjusted depreciable basis of the GAA as of the beginning of your tax year in which the transaction takes place, minus
• The depreciation allowable to you for the year of the transfer.

For this purpose, the adjusted depreciable basis of a GAA is the unadjusted depreciable basis of the GAA minus any depreciation allowed or allowable for the GAA.

Abusive transactions. If you dispose of GAA property in an abusive transaction, you must remove it from the GAA. A disposition is an abusive transaction if it is not a nonrecognition transaction (described earlier) or a like-kind exchange or involuntary conversion and a main purpose for the disposition is to get a tax benefit or a result that would not be available without the use of a GAA. Examples of abusive transactions include the following.

1. A transaction with a main purpose of shifting income or deductions among taxpayers in a way that would not be possible without choosing to use a GAA to take advantage of differing effective tax rates.

2. A choice to use a GAA with a main purpose of disposing of property from the GAA so that you can use an expiring net operating loss or credit. For example, if you have a net operating loss carryover or a credit carryover, the following transactions will be considered abusive transactions unless there is strong evidence to the contrary.

a. A transfer of GAA property to a related person.

b. A transfer of GAA property under an agreement where the property continues to be used, or is available for use, by you.

Figuring gain or loss. You must determine the gain, loss, or other deduction due to an abusive transaction by taking into account the property's adjusted basis. The adjusted basis of the property at the time of the disposition is the result of the following:

• The unadjusted depreciable basis of the property, minus
• The depreciation allowed or allowable for the property figured by using the depreciation method, recovery period, and convention that applied to the GAA in which the property was included.

If there is a gain, the amount subject to recapture as ordinary income is the smaller of the following.

1. The depreciation allowed or allowable for the property, including any expensed cost (such as section 179 deductions or the additional depreciation allowed or allowable for the property).

2. The result of the following:

a. The original unadjusted depreciable basis of the GAA (plus, for section 1245 property originally included in the GAA, any expensed cost), minus

b. The total gain previously recognized as ordinary income on the disposition of property from the GAA.

Qualifying dispositions. If you dispose of GAA property in a qualifying disposition, you can choose to remove the property from the GAA. A qualifying disposition is one that does not involve all the property, or the last item of property, remaining in a GAA and that is described by any of the following.

1. A disposition that is a direct result of fire, storm, shipwreck, other casualty, or theft.

2. A charitable contribution for which a deduction is allowed.

3. A disposition that is a direct result of a cessation, termination, or disposition of a business, manufacturing or other income-producing process, operation, facility, plant, or other unit (other than by transfer to a supplies, scrap, or similar account).

4. A nontaxable transaction other than a nonrecognition transaction (described earlier), a like-kind exchange or involuntary conversion, or a transaction that is nontaxable only because it is a disposition from a GAA.

If you choose to remove the property from the GAA, figure your gain, loss, or other deduction resulting from the disposition in the manner described earlier under Abusive transactions.

Like-kind exchanges and involuntary conversions. If you dispose of GAA property as a result of a like-kind exchange or involuntary conversion, you must remove from the GAA the property that you transferred. See chapter 1 of Publication 544 for information on these transactions. Figure your gain, loss, or other deduction resulting from the disposition in the manner described earlier under Abusive transactions.

Example. Sankofa, a calendar-year corporation, maintains one GAA for 12 machines. Each machine costs $15,000 and was placed in service in 2008. Of the 12 machines, nine cost a total of $135,000 and are used in Sankofa's New York plant and three machines cost $45,000 and are used in Sankofa's New Jersey plant. Assume this GAA uses the 200% declining balance depreciation method, a 5-year recovery period, and a half-year convention. Sankofa does not claim the section 179 deduction and the machines do not qualify for a special depreciation allowance. As of January 1, 2010, the depreciation reserve account for the GAA is $93,600.

In May 2010, Sankofa sells its entire manufacturing plant in New Jersey to an unrelated person. The sales proceeds allocated to each of the three machines at the New Jersey plant is $5,000. This transaction is a qualifying disposition, so Sankofa chooses to remove the three machines from the GAA and figure the gain, loss, or other deduction by taking into account their adjusted bases.

For Sankofa's 2010 return, the depreciation allowance for the GAA is figured as follows. As of December 31, 2009, the depreciation allowed or allowable for the three machines at the New Jersey plant is $23,400. As of January 1, 2010, the unadjusted depreciable basis of the GAA is reduced from $180,000 to $135,000 ($180,000 minus the $45,000 unadjusted depreciable bases of the three machines), and the depreciation reserve account is decreased from $93,600 to $70,200 ($93,600 minus $23,400 depreciation allowed or allowable for the three machines as of December 31, 2009). The depreciation allowance for the GAA in 2010 is $25,920 [($135,000 - $70,200) x 40%].

For Sankofa's 2010 return, gain or loss for each of the three machines at the New Jersey plant is determined as follows. The depreciation allowed or allowable in 2010 for each machine is $1,440 [(($15,000 - $7,800) x 40%) ÷ 2]. The adjusted basis of each machine is $5,760 (the adjusted depreciable basis of $7,200 removed from the account less the $1,440 depreciation allowed or allowable in 2010). As a result, the loss recognized in 2010 for each machine is $760 ($5,000 - $5,760). This loss is subject to section 1231 treatment. See chapter 3 of Publication 544 for information on section 1231 losses.

Disposition of all property in a GAA. If you dispose of all the property, or the last item of property, in a GAA, you can choose to end the GAA. If you make this choice, you figure the gain or loss by comparing the adjusted depreciable basis of the GAA with the amount realized.

If there is a gain, the amount subject to recapture as ordinary income is limited to the result of the following.

• The depreciation allowed or allowable for the GAA, including any expensed cost (such as section 179 deductions or the additional depreciation allowed or allowable for the GAA), minus
• The total gain previously recognized as ordinary income on the disposition of property from the GAA.

Like-kind exchanges and involuntary conversions. If you dispose of all the property or the last item of property in a GAA as a result of a like-kind exchange or involuntary conversion, the GAA terminates. You must figure the gain or loss in the manner described above under Disposition of all property in a GAA.

Example. Duforcelf, a calendar-year corporation, maintains a GAA for 1,000 calculators that cost a total of $60,000 and were placed in service in 2007. Assume this GAA is depreciated under the 200% declining balance method, has a recovery period of 5 years, and uses a half-year convention. Duforcelf does not claim the section 179 deduction and the calculators do not qualify for a special depreciation allowance. In 2009, Duforcelf sells 200 of the calculators to an unrelated person for $10,000. The $10,000 is recognized as ordinary income.

In March 2010, Duforcelf sells the remaining calculators in the GAA to an unrelated person for $35,000. Duforcelf decides to end the GAA.

On the date of the disposition, the adjusted depreciable basis of the account is $23,040 (unadjusted depreciable basis of $60,000 minus the depreciation allowed or allowable of $36,960). In 2010, Duforcelf recognizes a gain of $11,960. This is the amount realized of $35,000 minus the adjusted depreciable basis of $23,040. The gain subject to recapture as ordinary income is limited to the depreciation allowed or allowable minus the amounts previously recognized as ordinary income ($36,960 - $10,000 = $26,960). Therefore, the entire gain of $11,960 is recaptured as ordinary income.

Electing To Use a GAA

An election to include property in a GAA is made separately by each owner of the property. This means that an election to include property in a GAA must be made by each member of a consolidated group and at the partnership or S corporation level (and not by each partner or shareholder separately).

How to make the election. Make the election by completing line 18 of Form 4562.

When to make the election. You must make the election on a timely filed tax return (including extensions) for the year in which you place in service the property included in the GAA. However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 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.

RECORDS: You must maintain records that identify the property included in each GAA, that establish the unadjusted depreciable basis and depreciation reserve of the GAA, and that reflect the amount realized during the year upon dispositions from each GAA. However, see chapter 2 for the recordkeeping requirements for section 179 property.

Revoking an election. You can revoke an election to use a GAA only in the following situations.

• You include in the GAA property that generates foreign source income, both United States and foreign source income, or combined gross income of an FSC, a DISC, or a possessions corporation and its related supplier, and that inclusion results in a substantial distortion of income.
• You remove property from the GAA as described under Terminating GAA Treatment, earlier.

When Do You Recapture MACRS Depreciation?

Terms you may need to know (see Glossary):

• Disposition
• Nonresidential real property
• Recapture
• Residential rental property

When you dispose of property that you depreciated using MACRS, any gain on the disposition generally is recaptured (included in income) as ordinary income up to the amount of the depreciation previously allowed or allowable for the property. Depreciation, for this purpose, includes the following.

• Any section 179 deduction claimed on the property.
• Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur regulations.
• Any deduction under section 179C of the Internal Revenue Code for certain qualified refinery property placed in service after August 8, 2005.
• Any deduction under section 179D of the Internal Revenue Code for certain energy efficient commercial building property placed in service after December 31, 2005.
• Any deduction under section 179E of the Internal Revenue Code for qualified advanced mine safety equipment property placed in service after December 20, 2006.
• Any deduction under section 190 of the Internal Revenue Code for removal of barriers to the disabled and the elderly.
• Any deduction under section 193 of the Internal Revenue Code for tertiary injectants.
• Any special depreciation allowance previously allowed or allowable for the property (unless you elected not to claim it).

There is no recapture for residential rental and nonresidential real property unless that property is qualified property for which you claimed a special depreciation allowance. For more information on depreciation recapture, see Publication 544.
Introduction

This chapter discusses the deduction limits and other special rules that apply to certain listed property. Listed property includes cars and other property used for transportation, property used for entertainment, and certain computers and cellular phones.

Deductions for listed property (other than certain leased property) are subject to the following special rules and limits.

• Deduction for employees. If your use of the property is not for your employer's convenience or is not required as a condition of your employment, you cannot deduct depreciation or rent expenses for your use of the property as an employee.
• Business-use requirement. If the property is not used predominantly (more than 50%) for qualified business use, you cannot claim the section 179 deduction or a special depreciation allowance. In addition, you must figure any depreciation deduction under the Modified Accelerated Cost Recovery System (MACRS) using the straight line method over the ADS recovery period. You may also have to recapture (include in income) any excess depreciation claimed in previous years. A similar inclusion amount applies to certain leased property.
• Passenger automobile limits and rules. Annual limits apply to depreciation deductions (including section 179 deductions and any special depreciation allowance) for certain passenger automobiles. You can continue to deduct depreciation for the unrecovered basis resulting from these limits after the end of the recovery period.

This chapter defines listed property and explains the special rules and depreciation deduction limits that apply, including the special inclusion amount rule for leased property. It also discusses the recordkeeping rules for listed property and explains how to report information about the property on your tax return.

CAUTION:For information on the limits on depreciation deductions for listed property placed in service before 1987, see Publication 534.

Useful Items

You may want to see:

Publication

• 463 Travel, Entertainment, Gift, and Car Expenses
• 535 Business Expenses
• 587 Business Use of Your Home (Including Use by Daycare Providers)

Form (and Instructions)

• 2106 Employee Business Expenses
• 2106-EZ Unreimbursed Employee Business Expenses
• 4562 Depreciation and Amortization
• 4797 Sales of Business Property

See chapter 6 for information about getting publications and forms.

What Is Listed Property?

Terms you may need to know (see Glossary):

• Capitalized
• Commuting
• Improvement
• Recovery period
• Straight line method

Listed property is any of the following.

• Passenger automobiles weighing 6,000 pounds or less.
• Any other property used for transportation, unless it is an excepted vehicle.
• Property generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video-recording equipment).
• Computers and related peripheral equipment, unless used only at a regular business establishment and owned or leased by the person operating the establishment. A regular business establishment includes a portion of a dwelling unit that is used both regularly and exclusively for business as discussed in Publication 587.
• Cellular telephones (or similar telecommunication equipment).

Improvements to listed property. An improvement made to listed property that must be capitalized is treated as a new item of depreciable property. The recovery period and method of depreciation that apply to the listed property as a whole also apply to the improvement. For example, if you must depreciate the listed property using the straight line method, you also must depreciate the improvement using the straight line method.

Passenger Automobiles

A passenger automobile is any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (6,000 pounds or less of gross vehicle weight for trucks and vans). It includes any part, component, or other item physically attached to the automobile at the time of purchase or usually included in the purchase price of an automobile.

The following vehicles are not considered passenger automobiles for these purposes.

• An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business.
• A vehicle used directly in the trade or business of transporting persons or property for pay or hire.
• A truck or van that is a qualified nonpersonal use vehicle.

Qualified nonpersonal use vehicles. Qualified nonpersonal use vehicles are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes. They include the trucks and vans listed as excepted vehicles under Other Property Used for Transportation, next. They also include trucks and vans that have been specially modified so that they are not likely to be used more than a minimal amount for personal purposes, such as by installation of permanent shelving and painting the vehicle to display advertising or the company's name.

For a detailed discussion of passenger automobiles, including leased passenger automobiles, see Publication 463.

Other Property Used for Transportation

CAUTION:Although vehicles used to transport persons or property for pay or hire and vehicles rated at more than the 6,000-pound threshold are not passenger automobiles, they are still "other property used for transportation" and are subject to the special rules for listed property.

Other property used for transportation includes trucks, buses, boats, airplanes, motorcycles, and any other vehicles used to transport persons or goods.

Excepted vehicles. Other property used for transportation does not include the following qualified nonpersonal use vehicles (defined earlier under Passenger Automobiles).

• Clearly marked police and fire vehicles.
• Unmarked vehicles used by law enforcement officers if the use is officially authorized.
• Ambulances used as such and hearses used as such.
• Any vehicle with a loaded gross vehicle weight of over 14,000 pounds that is designed to carry cargo.
• Bucket trucks (cherry pickers), cement mixers, dump trucks (including garbage trucks), flatbed trucks, and refrigerated trucks.
• Combines, cranes and derricks, and forklifts.
• Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat.
• Qualified moving vans.
• Qualified specialized utility repair trucks.
• School buses used in transporting students and employees of schools.
• Other buses with a capacity of at least 20 passengers that are used as passenger buses.
• Tractors and other special purpose farm vehicles.

Clearly marked police and fire vehicle. A clearly marked police or fire vehicle is a vehicle that meets all the following requirements.

• It is owned or leased by a governmental unit or an agency or instrumentality of a governmental unit.
• It is required to be used for commuting by a police officer or fire fighter who, when not on a regular shift, is on call at all times.
• It is prohibited from being used for personal use (other than commuting) outside the limit of the police officer's arrest powers or the fire fighter's obligation to respond to an emergency.
• It is clearly marked with painted insignia or words that make it readily apparent that it is a police or fire vehicle. A marking on a license plate is not a clear marking for these purposes.

Qualified moving van. A qualified moving van is any truck or van used by a professional moving company for moving household or business goods if the following requirements are met.

• No personal use of the van is allowed other than for travel to and from a move site or for minor personal use, such as a stop for lunch on the way from one move site to another.
• Personal use for travel to and from a move site happens no more than five times a month on average.
• Personal use is limited to situations in which it is more convenient to the employer, because of the location of the employee's residence in relation to the location of the move site, for the van not to be returned to the employer's business location.

Qualified specialized utility repair truck. A truck is a qualified specialized utility repair truck if it is not a van or pickup truck and all the following apply.

• The truck was specifically designed for and is used to carry heavy tools, testing equipment, or parts.
• Shelves, racks, or other permanent interior construction has been installed to carry and store the tools, equipment, or parts and would make it unlikely that the truck would be used, other than minimally, for personal purposes.
• The employer requires the employee to drive the truck home in order to be able to respond in emergency situations for purposes of restoring or maintaining electricity, gas, telephone, water, sewer, or steam utility services.

Computers and Related Peripheral Equipment

A computer is a programmable, electronically activated device capable of accepting information, applying prescribed processes to the information, and supplying the results of those processes with or without human intervention. It consists of a central processing unit with extensive storage, logic, arithmetic, and control capabilities.

Related peripheral equipment is any auxiliary machine which is designed to be controlled by the central processing unit of a computer.

The following are neither computers nor related peripheral equipment.

• Any equipment that is an integral part of other property that is not a computer.
• Typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment.
• Equipment of a kind used primarily for the user's amusement or entertainment, such as video games.

Can Employees Claim a Deduction?

If you are an employee, you can claim a depreciation deduction for the use of your listed property (whether owned or rented) in performing services as an employee only if your use is a business use. The use of your property in performing services as an employee is a business use only if both the following requirements are met.

• The use is for your employer's convenience.
• The use is required as a condition of your employment.

If these requirements are not met, you cannot deduct depreciation (including the section 179 deduction) or rent expenses for your use of the property as an employee.

Employer's convenience. Whether the use of listed property is for your employer's convenience must be determined from all the facts. The use is for your employer's convenience if it is for a substantial business reason of the employer. The use of listed property during your regular working hours to carry on your employer's business generally is for the employer's convenience.

Condition of employment. Whether the use of listed property is a condition of your employment depends on all the facts and circumstances. The use of property must be required for you to perform your duties properly. Your employer does not have to require explicitly that you use the property. However, a mere statement by the employer that the use of the property is a condition of your employment is not sufficient.

Example 1. Virginia Sycamore is employed as a courier with We Deliver, which provides local courier services. She owns and uses a motorcycle to deliver packages to downtown offices. We Deliver explicitly requires all delivery persons to own a car or motorcycle for use in their employment. Virginia's use of the motorcycle is for the convenience of We Deliver and is required as a condition of employment.

Example 2. Bill Nelson is an inspector for Uplift, a construction company with many sites in the local area. He must travel to these sites on a regular basis. Uplift does not furnish an automobile or explicitly require him to use his own automobile. However, it pays him for any costs he incurs in traveling to the various sites. The use of his own automobile or a rental automobile is for the convenience of Uplift and is required as a condition of employment.

Example 3. Assume the same facts as in Example 2 except that Uplift furnishes a car to Bill, who chooses to use his own car and receive payment for using it. The use of his own car is neither for the convenience of Uplift nor required as a condition of employment.

Example 4. Marilyn Lee is a pilot for Y Company, a small charter airline. Y requires pilots to obtain 80 hours of flight time annually in addition to flight time spent with the airline. Pilots usually can obtain these hours by flying with the Air Force Reserve or by flying part-time with another airline. Marilyn owns her own airplane. The use of her airplane to obtain the required flight hours is neither for the convenience of the employer nor required as a condition of employment.

Example 5. David Rule is employed as an engineer with Zip, an engineering contracting firm. He occasionally takes work home at night rather than work late in the office. He owns and uses a home computer which is virtually identical to the office model. His use of the computer is neither for the convenience of his employer nor required as a condition of employment.

What Is the Business-Use Requirement?

Terms you may need to know (see Glossary):

• Adjusted basis
• Business/investment use
• Capitalized
• Commuting
• Declining balance method
• Fair market value (FMV)
• Nonresidential real property
• Placed in service
• Recapture
• Recovery period
• Straight line method

You can claim the section 179 deduction and a special depreciation allowance for listed property and depreciate listed property using GDS and a declining balance method if the property meets the business-use requirement. To meet this requirement, listed property must be used predominantly (more than 50% of its total use) for qualified business use. If this requirement is not met, the following rules apply.

• Property not used predominantly for qualified business use during the year it is placed in service does not qualify for the section 179 deduction.
• Property not used predominantly for qualified business use during the year it is placed in service does not qualify for a special depreciation allowance.
• Any depreciation deduction under MACRS for property not used predominantly for qualified business use during any year must be figured using the straight line method over the ADS recovery period. This rule applies each year of the recovery period.
• Excess depreciation on property previously used predominantly for qualified business use must be recaptured (included in income) in the first year in which it is no longer used predominantly for qualified business use.
• A lessee must add an inclusion amount to income in the first year in which the leased property is not used predominantly for qualified business use.

  CAUTION: Being required to use the straight line method for an item of listed property not used predominantly for qualified business use is not the same as electing the straight line method. It does not mean that you have to use the straight line method for other property in the same class as the item of listed property.

Exception for leased property. The business-use requirement generally does not apply to any listed property leased or held for leasing by anyone regularly engaged in the business of leasing listed property.

You are considered regularly engaged in the business of leasing listed property only if you enter into contracts for the leasing of listed property with some frequency over a continuous period of time. This determination is made on the basis of the facts and circumstances in each case and takes into account the nature of your business in its entirety. Occasional or incidental leasing activity is insufficient. For example, if you lease only one passenger automobile during a tax year, you are not regularly engaged in the business of leasing automobiles. An employer who allows an employee to use the employer's property for personal purposes and charges the employee for the use is not regularly engaged in the business of leasing the property used by the employee.

How To Allocate Use

To determine whether the business-use requirement is met, you must allocate the use of any item of listed property used for more than one purpose during the year among its various uses.

For passenger automobiles and other means of transportation, allocate the property's use on the basis of mileage. You determine the percentage of qualified business use by dividing the number of miles you drove the vehicle for business purposes during the year by the total number of miles you drove the vehicle for all purposes (including business miles) during the year.

For other listed property, allocate the property's use on the basis of the most appropriate unit of time the property is actually used (rather than merely being available for use). For example, you can determine the percentage of business use of a computer by dividing the number of hours you used the computer for business purposes during the year by the total number of hours you used the computer for all purposes (including business use) during the year.

Entertainment use. Treat the use of listed property for entertainment, recreation, or amusement purposes as a business use only to the extent you can deduct expenses (other than interest and property tax expenses) due to its use as an ordinary and necessary business expense.

Commuting use. The use of an automobile for commuting is not business use, regardless of whether work is performed during the trip. For example, a business telephone call made on a car telephone while commuting to work does not change the character of the trip from commuting to business. This is also true for a business meeting held in a car while commuting to work. Similarly, a business call made on an otherwise personal trip does not change the character of a trip from personal to business. The fact that an automobile is used to display material that advertises the owner's or user's trade or business does not convert an otherwise personal use into business use.

Use of your automobile by another person. If someone else uses your automobile, do not treat that use as business use unless one of the following conditions applies.

1. That use is directly connected with your business.

2. You properly report the value of the use as income to the other person and withhold tax on the income where required.

3. You are paid a fair market rent.

Treat any payment to you for the use of the automobile as a rent payment for purposes of item (3).

Employee deductions. If you are an employee, do not treat your use of listed property as business use unless it is for your employer's convenience and is required as a condition of your employment. See Can Employees Claim a Deduction, earlier.

Qualified Business Use

Qualified business use of listed property is any use of the property in your trade or business. However, it does not include the following uses.

• The leasing of property to any 5% owner or related person (to the extent the property is used by a 5% owner or person related to the owner or lessee of the property).
• The use of property as pay for the services of a 5% owner or related person.
• The use of property as pay for services of any person (other than a 5% owner or related person), unless the value of the use is included in that person's gross income and income tax is withheld on that amount where required.

  CAUTION: Property does not stop being used predominantly for qualified business use because of a transfer at death.

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

5% owner. For a business entity that is not a corporation, a 5% owner is any person who owns more than 5% of the capital or profits interest in the business.

For a corporation, a 5% owner is any person who owns, or is considered to own, either of the following.

• More than 5% of the outstanding stock of the corporation.
• Stock possessing more than 5% of the total combined voting power of all stock in the corporation.

Related persons. For a description of related persons, see Related persons in the discussion on property owned or used in 1986 under Which Method Can You Use To Depreciate Your Property in chapter 1. For this purpose, however, treat as related persons only the relationships listed in items (1) through (10) of that discussion and substitute "50%" for "10%" each place it appears.

Examples. The following examples illustrate whether the use of business property is qualified business use.

Example 1. John Maple is the sole proprietor of a plumbing contracting business. John employs his brother, Richard, in the business. As part of Richard's pay, he is allowed to use one of the company automobiles for personal use. The company includes the value of the personal use of the automobile in Richard's gross income and properly withholds tax on it. The use of the automobile is pay for the performance of services by a related person, so it is not a qualified business use.

Example 2. John, in Example 1, allows unrelated employees to use company automobiles for personal purposes. He does not include the value of the personal use of the company automobiles as part of their compensation and he does not withhold tax on the value of the use of the automobiles. This use of company automobiles by employees is not a qualified business use.

Example 3. James Company Inc. owns several automobiles that its employees use for business purposes. The employees also are allowed to take the automobiles home at night. The fair market value of each employee's use of an automobile for any personal purpose, such as commuting to and from work, is reported as income to the employee and James Company withholds tax on it. This use of company automobiles by employees, even for personal purposes, is a qualified business use for the company.

Investment Use

The use of property to produce income in a nonbusiness activity (investment use) is not a qualified business use. However, you can treat the investment use as business use to figure the depreciation deduction for the property in a given year.

Example 1. Sarah Bradley uses a home computer 50% of the time to manage her investments. She also uses the computer 40% of the time in her part-time consumer research business. Sarah's home computer is listed property because it is not used at a regular business establishment. She does not use the computer predominantly for qualified business use. Therefore, she cannot elect a section 179 deduction or claim a special depreciation allowance for the computer. She must depreciate it using the straight line method over the ADS recovery period. Her combined business/investment use for determining her depreciation deduction is 90%.

Example 2. If Sarah uses her computer 30% of the time to manage her investments and 60% of the time in her consumer research business, it is used predominantly for qualified business use. She can elect a section 179 deduction and, if she does not deduct all the computer's cost, she can claim a special depreciation allowance and depreciate the computer using the 200% declining balance method over the GDS recovery period. Her combined business/investment use for determining her depreciation deduction is 90%.

Recapture of Excess Depreciation

If you used listed property more than 50% in a qualified business use in the year you placed it in service, you must recapture (include in income) excess depreciation in the first year you use it 50% or less. You also increase the adjusted basis of your property by the same amount.

Excess depreciation is:

1. The depreciation allowable for the property (including any section 179 deduction and special depreciation allowance claimed) for years before the first year you do not use the property predominantly for qualified business use, minus

2. The depreciation that would have been allowable for those years if you had not used the property predominantly for qualified business use in the year you placed it in service.

To determine the amount in (2) above, you must refigure the depreciation using the straight line method and the ADS recovery period.

Example. In June 2005, Ellen Rye purchased and placed in service a pickup truck that cost $18,000. She used it only for qualified business use for 2005 through 2008. Ellen claimed a section 179 deduction of $10,000 based on the purchase of the truck. She began depreciating it using the 200% DB method over a 5-year GDS recovery period. The pickup truck's gross vehicle weight was over 6,000 pounds, so it was not subject to the passenger automobile limits discussed later under Do the Passenger Automobile Limits Apply. During 2009, she used the truck 50% for business and 50% for personal purposes. She includes $4,018 excess depreciation in her gross income for 2009. The excess depreciation is determined as follows.

 Total section 179 deduction ($10,000) and
   depreciation claimed ($6,618) for 2005 through
   2008. (Depreciation is from Table A-1.)         $16,618

 Minus: Depreciation allowable (Table
   A-8):

   2005 - 10% of $18,000                $1,800
   2006 - 20% of $18,000                 3,600
   2007 - 20% of $18,000                 3,600
   2008 - 20% of $18,000                 3,600      12,600
                                        ______     _______
 Excess depreciation                                $4,018
                                                   =======

If Ellen's use of the truck does not change to 50% for business and 50% for personal purposes until 2011, there will be no excess depreciation. The total depreciation allowable using Table A-8 through 2011 will be $18,000, which equals the total of the section 179 deduction and depreciation she will have claimed.

Where to figure and report recapture. Use Form 4797, Part IV, to figure the recapture amount. Report the recapture amount as other income on the same form or schedule on which you took the depreciation deduction. For example, report the recapture amount as other income on Schedule C (Form 1040) if you took the depreciation deduction on Schedule C. If you took the depreciation deduction on Form 2106, report the recapture amount as other income on Form 1040, line 21.

Lessee's Inclusion Amount

If you use leased listed property other than a passenger automobile for business/investment use, you must include an amount in your income in the first year your qualified business-use percentage is 50% or less. Your qualified business-use percentage is the part of the property's total use that is qualified business use (defined earlier). For the inclusion amount rules for a leased passenger automobile, see Leasing a Car in chapter 4 of Publication 463.

The inclusion amount is the sum of Amount A and Amount B, described next. However, see the special rules for the inclusion amount, later, if your lease begins in the last 9 months of your tax year or is for less than one year.

Amount A. Amount A is:

1. The fair market value of the property, multiplied by

2. The business/investment use for the first tax year the qualified business-use percentage is 50% or less, multiplied by

3. The applicable percentage from Table A-19 in Appendix A.

The fair market value of the property is the value on the first day of the lease term. If the capitalized cost of an item of listed property is specified in the lease agreement, you must treat that amount as the fair market value.

Amount B. Amount B is:

1. The fair market value of the property, multiplied by

2. The average of the business/investment use for all tax years the property was leased that precede the first tax year the qualified business-use percentage is 50% or less, multiplied by

3. The applicable percentage from Table A-20 in Appendix A.

Maximum inclusion amount. The inclusion amount cannot be more than the sum of the deductible amounts of rent for the tax year in which the lessee must include the amount in gross income.

Inclusion amount worksheet. The following worksheet is provided to help you figure the inclusion amount for leased listed property.

Inclusion Amount Worksheet
                  for Leased Listed Property

                      Keep for Your Records
 _____________________________________________________________
  1. Fair market value                                ________

  2. Business/investment use for first year
     business use is 50% or less                      ________

  3. Multiply line 1 by line 2.                       ________

  4. Rate (%) from Table A-19                         ________

  5. Multiply line 3 by line 4. This is Amount A.     ________

  6. Fair market value                                ________

  7. Average business/investment use for years
     property leased before the first year
     business use is 50% or less                      ________

  8. Multiply line 6 by line 7                        ________

  9. Rate (%) from Table A-20                         ________

 10. Multiply line 8 by line 9. This is Amount B      ________

 11. Add line 5 and line 10. This is your inclusion
     amount. Enter here and as other income on
     the form or schedule on which you originally
     took the deduction (for example, Schedule C
     or F (Form 1040), Form 1040, Form 1120,
     etc.)                                            ________
 _____________________________________________________________

Example. On February 1, 2007, Larry House, a calendar year taxpayer, leased and placed in service a computer with a fair market value of $3,000. The lease is for a period of 5 years. Larry does not use the computer at a regular business establishment, so it is listed property. His business use of the property (all of which is qualified business use) is 80% in 2007, 60% in 2008, and 40% in 2009. He must add an inclusion amount to gross income for 2009, the first tax year his qualified business-use percentage is 50% or less. The computer has a 5-year recovery period under both GDS and ADS. 2009 is the third tax year of the lease, so the applicable percentage from Table A-19 is -19.8%. The applicable percentage from Table A-20 is 22.0%. Larry's deductible rent for the computer for 2009 is $800.

Larry uses the Inclusion Amount Worksheet for Leased Listed Property to figure the amount he must include in income for 2009. His inclusion amount is $224, which is the sum of -$238 (Amount A) and $462 (Amount B).

Inclusion Amount Worksheet
                  for Leased Listed Property

                       Keep for Your Records
 _________________________________________________________
  1. Fair market value                             $3,000
                                                   ______

  2. Business/investment use for first year
     business use is 50% or less                       40%
                                                   ______

  3. Multiply line 1 by line 2                      1,200
                                                   ______

  4. Rate (%) from Table A-19                       -19.8%
                                                   ______

  5. Multiply line 3 by line 4. This is Amount A.    -238
                                                   ______

  6. Fair market value                              3,000
                                                   ______

  7. Average business/investment use for years
     property leased before the first year
     business use is 50% or less                       70%
                                                   ______

  8. Multiply line 6 by line 7                      2,100
                                                   ______

  9. Rate (%) from Table A-20                        22.0%
                                                   ______

 10. Multiply line 8 by line 9. This is Amount B.     462
                                                   ______

 11. Add line 5 and line 10. This is your
     inclusion amount. Enter here and as other
     income on the form or schedule on which
     you originally took the deduction (for
     example, Schedule C or F (Form 1040),
     Form 1040, Form 1120, etc.)                     $224
                                                   ______
 _________________________________________________________

Lease beginning in the last 9 months of your tax year. The inclusion amount is subject to a special rule if all the following apply.

• The lease term begins within 9 months before the close of your tax year.
• You do not use the property predominantly (more than 50%) for qualified business use during that part of the tax year.
• The lease term continues into your next tax year.

Under this special rule, add the inclusion amount to income in the next tax year. Figure the inclusion amount by taking into account the average of the business/investment use for both tax years (line 2 of the Inclusion Amount Worksheet for Leased Listed Property) and the applicable percentage for the tax year the lease term begins. Skip lines 6 through 9 of the worksheet and enter zero on line 10.

Example 1. On August 1, 2008, Julie Rule, a calendar year taxpayer, leased and placed in service an item of listed property. The property is 5-year property with a fair market value of $10,000. Her property has a recovery period of 5 years under ADS. The lease is for 5 years. Her business use of the property was 50% in 2008 and 90% in 2009. She paid rent of $3,600 for 2009, of which $3,240 is deductible. She must include $147 in income in 2009. The $147 is the sum of Amount A and Amount B. Amount A is $147 ($10,000 x 70% x 2.1%), the product of the fair market value, the average business use for 2008 and 2009, and the applicable percentage for year one from Table A-19. Amount B is zero.

Lease for less than one year. A special rule for the inclusion amount applies if the lease term is less than one year and you do not use the property predominantly (more than 50%) for qualified business use. The amount included in income is the inclusion amount (figured as described in the preceding discussions) multiplied by a fraction. The numerator of the fraction is the number of days in the lease term and the denominator is 365 (or 366 for leap years).

The lease term for listed property other than residential rental or nonresidential real property includes options to renew. If you have two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar property, treat them as one lease.

Example 2. On October 1, 2008, John Joyce, a calendar year taxpayer, leased and placed in service an item of listed property that is 3-year property. This property had a fair market value of $15,000 and a recovery period of 5 years under ADS. The lease term was 6 months (ending on March 31, 2009), during which he used the property 45% in business. He must include $71 in income in 2009. The $71 is the sum of Amount A and Amount B. Amount A is $71 ($15,000 x 45% x 2.1% x 182/365), the product of the fair market value, the average business use for both years, and the applicable percentage for year one from Table A-19, prorated for the length of the lease. Amount B is zero.

Where to report inclusion amount. Report the inclusion amount figured as described in the preceding discussions as other income on the same form or schedule on which you took the deduction for your rental costs. For example, report the inclusion amount as other income on Schedule C (Form 1040) if you took the deduction on Schedule C. If you took the deduction for rental costs on Form 2106, report the inclusion amount as other income on Form 1040, line 21.

Do the Passenger Automobile Limits Apply?

Terms you may need to know (see Glossary):

• Basis
• Convention
• Placed in service
• Recovery period

The depreciation deduction, including the section 179 deduction, you can claim for a passenger automobile (defined earlier) each year is limited.

This section describes the maximum depreciation deduction amounts for 2009 and explains how to deduct, after the recovery period, the unrecovered basis of your property that results from applying the passenger automobile limit.

Exception for leased cars. The passenger automobile limits generally do not apply to passenger automobiles leased or held for leasing by anyone regularly engaged in the business of leasing passenger automobiles. For information on when you are considered regularly engaged in the business of leasing listed property, including passenger automobiles, see Exception for leased property, earlier, under What Is the Business-Use Requirement.

Maximum Depreciation Deduction

The passenger automobile limits are the maximum depreciation amounts you can deduct for a passenger automobile. They are based on the date you placed the automobile in service.

Passenger Automobiles

The maximum deduction amounts for most passenger automobiles are shown in the following table.

Maximum Depreciation Deduction
                   for Passenger Automobiles

    Date                                   4th &
   Placed      1st       2nd      3rd      Later
 In Service    Year      Year     Year     Years
 __________    ____      ____     ____     _____

    2009     $10,960¹   $4,800   $2,850   $1,775

    2008      10,960¹    4,800    2,850    1,775

    2007       3,060     4,900    2,850    1,775

    2006       2,960     4,800    2,850    1,775

    2005       2,960     4,700    2,850    1,675

    2004      10,610²    4,800    2,850    1,675

 5/06/2003-   10,710³    4,900    2,950    1,775
 12/31/2003

 1/01/2003-    7,660⁴    4,900    2,950    1,775
 5/05/2003

    2002       7,660⁴    4,900    2,950    1,775

    2001       7,660⁵    4,900    2,950    1,775

    2000       3,060     4,900    2,950    1,775

FOOTNOTES TO TABLE

¹ If you elected not to claim any special depreciation
 allowance for the vehicle or the vehicle is not qualified
 property, the maximum deduction is $2,960.

² If you elected not to claim any special depreciation
 allowance for the vehicle, the vehicle is not qualified property, or
 the vehicle is qualified Liberty Zone property, the maximum deduction
 is $2,960.

³ If you acquired the vehicle before 5/06/03, the
 maximum deduction is $7,660. If you elected not to claim any special
 depreciation allowance for the vehicle, the vehicle is not qualified
 property, or the vehicle is qualified Liberty Zone property, the
 maximum deduction is $3,060.

⁴ If you elected not to claim any special depreciation
 allowance for the vehicle, the vehicle is not qualified property, or
 the vehicle is qualified Liberty Zone property, the maximum deduction
 is $3,060.

⁵ If you acquired the vehicle before 9/11/01, you
 elected not to claim any special depreciation allowance for the
 vehicle, the vehicle is not qualified property, or the vehicle is
 qualified Liberty Zone property, the maximum deduction is $3,060.

END OF FOOTNOTES TO TABLE

CAUTION:If your business/investment use of the automobile is less than 100%, you must reduce the maximum deduction amount by multiplying the maximum amount by the percentage of business/investment use determined on an annual basis during the tax year.

CAUTION: If you have a short tax year, you must reduce the maximum deduction amount by multiplying the maximum amount by a fraction. The numerator of the fraction is the number of months and partial months in the short tax year and the denominator is 12.

Example. On April 15, 2009, Virginia Hart bought and placed in service a new car for $14,500. She used the car only in her business. She files her tax return based on the calendar year. She does not elect a section 179 deduction and elected not to claim any special depreciation allowance for the car. Under MACRS, a car is 5-year property. Since she placed her car in service on April 15 and used it only for business, she uses the percentages in Table A-1 to figure her MACRS depreciation on the car. Virginia multiplies the $14,500 unadjusted basis of her car by 0.20 to get her MACRS depreciation of $2,900 for 2009. This $2,900 is below the maximum depreciation deduction of $2,960 for passenger automobiles placed in service in 2009. She can deduct the full $2,900.

Electric Vehicles

The maximum depreciation deductions for passenger automobiles that are produced to run primarily on electricity are higher than those for other automobiles. The maximum deduction amounts for electric vehicles placed in service after August 5, 1997, and before January 1, 2007, are shown in the following table. Owners of electric vehicles placed in service after December 31, 2006, should use the table of maximum deduction amounts on page 66 for electric vehicles classified as passenger automobiles or use the table of maximum deduction amounts on page 68 for electric vehicles classified as trucks and vans.

Maximum Depreciation Deduction
                     For Electric Vehicles

   Date                                   4th &
  Placed      1st       2nd      3rd      Later
 In Service   Year      Year     Year     Years
 __________   ____      ____     ____     _____

    2006     $8,980   $14,400   $8,650   $5,225

    2005      8,880    14,200    8,450    5,125

    2004     31,830¹   14,300    8,550    5,125

 5/06/2003-  32,030²   14,600    8,750    5,225
 12/31/2003

 1/01/2003-  22,880³   14,600    8,750    5,225
 5/05/2003

    2002     22,980⁴   14,700    8,750    5,325

    2001     23,080⁵   14,800    8,850    5,325

    2000      9,280    14,800    8,850    5,325

FOOTNOTES TO TABLE

¹ If you elected not to claim any special depreciation
 allowance for the vehicle or the vehicle is not qualified property,
 or the vehicle is qualified Liberty Zone property, the maximum
 deduction is $8,880.

² If you acquired the vehicle before 5/06/03, the
 maximum deduction is $22,880. If you elected not to claim any special
 depreciation allowance for the vehicle, the vehicle is not qualified
 property, or the vehicle is qualified Liberty Zone property, the
 maximum deduction is $9,080.

³ If you elected not to claim any special depreciation
 allowance for the vehicle, the vehicle is not qualified property, or
 the vehicle is qualified Liberty Zone property, the maximum deduction
 is $9,080.

⁴ If you elected not to claim any special depreciation
 allowance for the vehicle, the vehicle is not qualified property, or
 the vehicle is qualified Liberty Zone property, the maximum deduction
 is $9,180.

⁵ If you acquired the vehicle before 9/11/01, you
 elected not to claim any special depreciation allowance for the
 vehicle, the vehicle is not qualified property, or the vehicle is
 qualified Liberty Zone property, the maximum deduction is $9,280.

END OF FOOTNOTES TO TABLE

Trucks and Vans

The maximum depreciation deductions for trucks and vans placed in service after 2002 are higher than those for other passenger automobiles. The maximum deduction amounts for trucks and vans are shown in the following table.

Maximum Depreciation Deduction
                For Trucks and Vans

    Date                               4th &
   Placed       1st     2nd    3rd     Later
 In Service    Year    Year    Year    Years
 __________    ____    ____    ____    _____

    2009     $11,060¹  $4,900  $2,950  $1,775

    2008      11,160²   5,100   3,050   1,875

    2007       3,260    5,200   3,050   1,875

    2006       3,260    5,200   3,150   1,875

    2005       3,260    5,200   3,150   1,875

    2004      10,910³   5,300   3,150   1,875

 5/06/2003-   11,010⁴   5,400   3,250   1,975
 12/31/2003

 1/01/2003-    7,960⁵   5,400   3,250   1,975
  5/05/2003

FOOTNOTES TO TABLE

¹ If you elect not to claim any special depreciation
 allowance for the vehicle or the vehicle is not qualified property,
 the maximum deduction is $3,060.

² If you elected not to claim any special depreciation
 allowance for the vehicle or the vehicle is not qualified property,
 the maximum deduction is $3,160.

³ If you elected not to claim any special depreciation
 allowance for the vehicle, the vehicle is not qualified property, or
 the vehicle is qualified Liberty Zone property, or the maximum
 deduction is $3,260.

⁴ If you acquired the vehicle before 5/06/03, the
 maximum deduction is $7,960. If you elected not to claim any special
 depreciation allowance for the vehicle, the vehicle is not qualified
 property, or the vehicle is qualified Liberty Zone property, the
 maximum deduction is $3,360.

⁵ If you elected not to claim any special depreciation
 allowance for the vehicle, the vehicle is not qualified property, or
 the vehicle is qualified Liberty Zone property, the maximum deduction
 is $3,360.

END OF FOOTNOTES TO TABLE

Depreciation Worksheet for Passenger Automobiles

You can use the following worksheet to figure your depreciation deduction using the percentage tables. Then use the information from this worksheet to prepare Form 4562.

Depreciation Worksheet for
                     Passenger Automobiles

                         Keep for Your Records
 ______________________________________________________________________
                                Part I

  1. MACRS system (GDS or ADS)                           ______________
  2. Property class                                      ______________
  3. Date placed in service                              ______________
  4. Recovery period                                     ______________
  5. Method and convention                               ______________
  6. Depreciation rate (from tables)                     ______________
  7. Maximum depreciation deduction
     for this year from the appropriate
     table                                               ______
  8. Business/investment-use
     percentage                                          ______
  9. Multiply line 7 by line 8. This is your
     adjusted maximum depreciation
     deduction                                                   ______
 10. Section 179 deduction claimed this
     year (not more than line 9). Enter
     -0- if this is not the year you placed
     the car in service.                                         ______
 ______________________________________________________________________
     Note.

     1) If line 10 is equal to line 9, stop here. Your
     combined section 179 and depreciation deduction is
     limited to the amount on line 9.
     2) If line 10 is less than line 9, complete Part II.
 ______________________________________________________________________
                               Part II

 11. Subtract line 10 from line 9. This is
     the maximum amount you can
     deduct for depreciation                                     ______
 12. Cost or other basis                                 ______
 13. Multiply line 12 by line 8. This is
     your business/investment cost                       ______
 14. Section 179 deduction and any
     special depreciation allowance
     claimed in the year you placed the
     car in service                                      ______
 15. Subtract line 14 from line 13. This
     is your basis for depreciation                      ______
 16. Multiply line 15 by line 6. This is
     your tentative MACRS depreciation
     deduction                                                   ______
 17. Enter the lesser of line 11 or
     line 16. This is your MACRS
     depreciation deduction                                      ======

The following example shows how to figure your depreciation deduction using the worksheet.

Example. On September 26, 2009, Donald Banks bought and placed in service a new car for $18,000. He used the car 60% for business during 2009. He files his tax return based on the calendar year. Under GDS, his car is 5-year property. Donald is electing a section 179 deduction of $1,000 on the car. Also, the car does not qualify for any special depreciation allowance. He uses Table A-1 to determine the depreciation rate. Donald's MACRS depreciation deduction is limited to $776, as shown in the following worksheet on the next page.

Depreciation Worksheet for
                     Passenger Automobiles

                        Keep for Your Records
 ______________________________________________________________________
                                Part I

  1. MACRS system (GDS or ADS)                                      GDS
                                                      _________________

  2. Property class                                              5-year
                                                      _________________

  3. Date placed in service                                     9/26/09
                                                      _________________

  4. Recovery period                                             5-Year
                                                      _________________

  5. Method and convention                            200% DB/Half-Year
                                                      _________________

  6. Depreciation rate (from tables)                                .20
                                                      _________________

  7. Maximum depreciation deduction
     for this year from the appropriate
     table                                              $2,960
                                                      ________

  8. Business/investment-use
     percentage                                            60%
                                                      ________

  9. Multiply line 7 by line 8. This is
     your adjusted maximum
     depreciation deduction                                      $1,776
                                                               ________

 10. Section 179 deduction claimed
     this year (not more than line 9).
     Enter -0- if this is not the year
     you placed the car in service.                              $1,000
                                                               ________
 ______________________________________________________________________
     Note.

     1) If line 10 is equal to line 9, stop here. Your
     combined section 179 and depreciation deduction is
     limited to the amount on line 9.
     2) If line 10 is less than line 9, complete Part II.
 ______________________________________________________________________
                               Part II

 11. Subtract line 10 from line 9. This
     is the maximum amount you can
     deduct for depreciation                                       $776
                                                               ________

 12. Cost or other basis                               $18,000
                                                      ________

 13. Multiply line 12 by line 8. This is
     your business/investment cost                     $10,800
                                                      ________

 14. Section 179 deduction and any
     special depreciation allowance
     claimed in year you placed the
     car in service                                     $1,000
                                                      ________

 15. Subtract line 14 from line 13.
     This is your basis for
     depreciation                                       $9,800
                                                      ________

 16. Multiply line 15 by line 6. This is
     your tentative MACRS
     depreciation deduction                                      $1,960
                                                               ________

 17. Enter the lesser of line 11 or
     line 16. This is your MACRS
     depreciation deduction                                        $776
                                                               ========
 ______________________________________________________________________

Deductions After the Recovery Period

If the depreciation deductions for your automobile are reduced under the passenger automobile limits, you will have unrecovered basis in your automobile at the end of the recovery period. If you continue to use the automobile for business, you can deduct that unrecovered basis after the recovery period ends. You can claim a depreciation deduction in each succeeding tax year until you recover your full basis in the car. The maximum amount you can deduct each year is determined by the date you placed the car in service and your business/investment-use percentage. See Maximum Depreciation Deduction, earlier.

Unrecovered basis is the cost or other basis of the passenger automobile reduced by any clean-fuel vehicle deduction, electric vehicle credit, depreciation, and section 179 deductions that would have been allowable if you had used the car 100% for business and investment use and the passenger automobile limits had not applied.

CAUTION:You cannot claim a depreciation deduction for listed property other than passenger automobiles after the recovery period ends. There is no unrecovered basis at the end of the recovery period because you are considered to have used this property 100% for business and investment purposes during all of the recovery period.

Example. In May 2003, you bought and placed in service a car costing $31,500. The car was 5-year property under GDS (MACRS). You did not elect a section 179 deduction and elected not to claim any special depreciation allowance for the car. You used the car exclusively for business during the recovery period (2003 through 2008). You figured your depreciation as shown below.

 Year  Percentage  Amount   Limit  Allowed
 ____  __________  ______   _____  _______

 2003       20.0%  $6,300  $3,060   $3,060
 2004       32.0   10,080   4,900    4,900
 2005       19.2    6,048   2,950    2,950
 2006       11.52   3,629   1,775    1,775
 2007       11.52   3,629   1,775    1,775
 2008        5.76   1,814   1,775    1,775
                                   _______
  Total                            $16,235
                                   =======

At the end of 2008, you had an unrecovered basis of $15,265 ($31,500 - $16,235). If in 2009 and later years you continue to use the car 100% for business, you can deduct each year the lesser of $1,775 or your remaining unrecovered basis.

If your business use of the car had been less than 100% during any year, your depreciation deduction would have been less than the maximum amount allowable for that year. However, in figuring your unrecovered basis in the car, you would still reduce your basis by the maximum amount allowable as if the business use had been 100%. For example, if you had used your car 60% for business instead of 100%, your allowable depreciation deductions would have been $9,741 ($16,235 x 60%), but you still would have to reduce your basis by $16,235 to determine your unrecovered basis.

Deductions For Passenger Automobiles Acquired in a Trade-in

If you acquire a passenger automobile in a trade-in, depreciate the carryover basis separately as if the trade-in did not occur. If the automobile acquired in the trade-in is qualified GO Zone property, the carryover basis is eligible for a special depreciation allowance. See Qualified Gulf Opportunity Zone Property in chapter 3. Depreciate the part of the new automobile's basis that exceeds its carryover basis (excess basis) as if it were newly placed in service property. This excess basis is the additional cash paid for the new automobile in the trade-in.

The depreciation figured for the two components of the basis (carryover basis and excess basis) is subject to a single passenger automobile limit. Special rules apply in determining the passenger automobile limits. These rules and examples are discussed in section 1.168(i)-6(d)(3) of the regulations.

Instead of figuring depreciation for the carryover basis and the excess basis separately, you can elect to treat the old automobile as disposed of and both of the basis components for the new automobile as if placed in service at the time of the trade-in. For more information, including how to make this election, see Election out under Property Acquired in a Like-kind Exchange or Involuntary Conversion in chapter 4 and sections 1.168(i)-6(i) and 1.168(i)-6(j) of the regulations.

What Records Must Be Kept?

Terms you may need to know (see Glossary):

• Business/investment use
• Circumstantial evidence
• Documentary evidence

You cannot take any depreciation or section 179 deduction for the use of listed property unless you can prove your business/investment use with adequate records or with sufficient evidence to support your own statements. For listed property, you must keep records for as long as any recapture can still occur. Recapture can occur in any tax year of the recovery period.

Adequate Records

RECORDS: To meet the adequate records requirement, you must maintain an account book, diary, log, statement of expense, trip sheet, or similar record or other documentary evidence that, together with the receipt, is sufficient to establish each element of an expenditure or use. You do not have to record information in an account book, diary, or similar record if the information is already shown on the receipt. However, your records should back up your receipts in an orderly manner.

Elements of expenditure or use. Your records or other documentary evidence must support all the following.

• The amount of each separate expenditure, such as the cost of acquiring the item, maintenance and repair costs, capital improvement costs, lease payments, and any other expenses.
• The amount of each business and investment use (based on an appropriate measure, such as mileage for vehicles and time for other listed property), and the total use of the property for the tax year.
• The date of the expenditure or use.
• The business or investment purpose for the expenditure or use.

Written documents of your expenditure or use are generally better evidence than oral statements alone. You do not have to keep a daily log. However, some type of record containing the elements of an expenditure or the business or investment use of listed property made at or near the time of the expenditure or use and backed up by other documents is preferable to a statement you prepare later.

Timeliness. You must record the elements of an expenditure or use at the time you have full knowledge of the elements. An expense account statement made from an account book, diary, or similar record prepared or maintained at or near the time of the expenditure or use generally is considered a timely record if, in the regular course of business:

• The statement is given by an employee to the employer, or
• The statement is given by an independent contractor to the client or customer.

For example, a log maintained on a weekly basis, that accounts for use during the week, will be considered a record made at or near the time of use.

Business purpose supported. Generally, an adequate record of business purpose must be in the form of a written statement. However, the amount of detail necessary to establish a business purpose depends on the facts and circumstances of each case. A written explanation of the business purpose will not be required if the purpose can be determined from the surrounding facts and circumstances. For example, a salesperson visiting customers on an established sales route will not normally need a written explanation of the business purpose of his or her travel.

Business use supported. An adequate record contains enough information on each element of every business or investment use. The amount of detail required to support the use depends on the facts and circumstances. For example, a taxpayer who uses a truck for both business and personal purposes and whose only business use of the truck is to make customer deliveries on an established route can satisfy the requirement by recording the length of the route, including the total number of miles driven during the tax year and the date of each trip at or near the time of the trips.

Although you generally must prepare an adequate written record, you can prepare a record of the business use of listed property in a computer memory device that uses a logging program.

Separate or combined expenditures or uses. Each use by you normally is considered a separate use. However, you can combine repeated uses as a single item.

Record each expenditure as a separate item. Do not combine it with other expenditures. If you choose, however, you can combine amounts you spent for the use of listed property during a tax year, such as for gasoline or automobile repairs. If you combine these expenses, you do not need to support the business purpose of each expense. Instead, you can divide the expenses based on the total business use of the listed property.

You can account for uses that can be considered part of a single use, such as a round trip or uninterrupted business use, by a single record. For example, you can account for the use of a truck to make deliveries at several locations that begin and end at the business premises and can include a stop at the business in between deliveries by a single record of miles driven. You can account for the use of a passenger automobile by a salesperson for a business trip away from home over a period of time by a single record of miles traveled. Minimal personal use (such as a stop for lunch between two business stops) is not an interruption of business use.

Confidential information. If any of the information on the elements of an expenditure or use is confidential, you do not need to include it in the account book or similar record if you record it at or near the time of the expenditure or use. You must keep it elsewhere and make it available as support to the IRS director for your area on request.

Substantial compliance. If you have not fully supported a particular element of an expenditure or use, but have complied with the adequate records requirement for the expenditure or use to the satisfaction of the IRS director for your area, you can establish this element by any evidence the IRS director for your area deems adequate.

If you fail to establish to the satisfaction of the IRS director for your area that you have substantially complied with the adequate records requirement for an element of an expenditure or use, you must establish the element as follows.

• By your own oral or written statement containing detailed information as to the element.
• By other evidence sufficient to establish the element.

If the element is the cost or amount, time, place, or date of an expenditure or use, its supporting evidence must be direct evidence, such as oral testimony by witnesses or a written statement setting forth detailed information about the element or the documentary evidence. If the element is the business purpose of an expenditure, its supporting evidence can be circumstantial evidence.

Sampling. You can maintain an adequate record for part of a tax year and use that record to support your business and investment use of listed property for the entire tax year if it can be shown by other evidence that the periods for which you maintain an adequate record are representative of the use throughout the year.

Example 1. Denise Williams, a sole proprietor and calendar year taxpayer, operates an interior decorating business out of her home. She uses her automobile for local business visits to the homes or offices of clients, for meetings with suppliers and subcontractors, and to pick up and deliver items to clients. There is no other business use of the automobile, but she and family members also use it for personal purposes. She maintains adequate records for the first 3 months of the year showing that 75% of the automobile use was for business. Subcontractor invoices and paid bills show that her business continued at approximately the same rate for the rest of the year. If there is no change in circumstances, such as the purchase of a second car for exclusive use in her business, the determination that her combined business/investment use of the automobile for the tax year is 75% rests on sufficient supporting evidence.

Example 2. Assume the same facts as in Example 1, except that Denise maintains adequate records during the first week of every month showing that 75% of her use of the automobile is for business. Her business invoices show that her business continued at the same rate during the later weeks of each month so that her weekly records are representative of the automobile's business use throughout the month. The determination that her business/investment use of the automobile for the tax year is 75% rests on sufficient supporting evidence.

Example 3. Bill Baker, a sole proprietor and calendar year taxpayer, is a salesman in a large metropolitan area for a company that manufactures household products. For the first 3 weeks of each month, he occasionally uses his own automobile for business travel within the metropolitan area. During these weeks, his business use of the automobile does not follow a consistent pattern. During the fourth week of each month, he delivers all business orders taken during the previous month. The business use of his automobile, as supported by adequate records, is 70% of its total use during that fourth week. The determination based on the record maintained during the fourth week of the month that his business/investment use of the automobile for the tax year is 70% does not rest on sufficient supporting evidence because his use during that week is not representative of use during other periods.

Loss of records. When you establish that failure to produce adequate records is due to loss of the records through circumstances beyond your control, such as through fire, flood, earthquake, or other casualty, you have the right to support a deduction by reasonable reconstruction of your expenditures and use.

How Is Listed Property Information Reported?

You must provide the information about your listed property requested in Part V of Form 4562, Section A, if you claim either of the following deductions.

• Any deduction for a vehicle.
• A depreciation deduction for any other listed property.

If you claim any deduction for a vehicle, you also must provide the information requested in Section B. If you provide the vehicle for your employee's use, the employee must give you this information. If you provide any vehicle for use by an employee, you must first answer the questions in Section C to see if you meet an exception to completing Section B for that vehicle.

Vehicles used by your employees. You do not have to complete Section B, Part V, for vehicles used by your employees who are not more-than-5% owners or related persons if you meet at least one of the following requirements.

1. You maintain a written policy statement that prohibits one of the following uses of the vehicles.

a. All personal use including commuting.

b. Personal use, other than commuting, by employees who are not officers, directors, or 1%-or-more owners.

2. You treat all use of the vehicles by your employees as personal use.

3. You provide more than five vehicles for use by your employees, and you keep in your records the information on their use given to you by the employees.

4. For demonstrator automobiles provided to full-time salespersons, you maintain a written policy statement that limits the total mileage outside the salesperson's normal working hours and prohibits use of the automobile by anyone else, for vacation trips, or to store personal possessions.

Exceptions. If you file Form 2106, 2106-EZ, or Schedule C-EZ (Form 1040), and you are not required to file Form 4562, report information about listed property on that form and not on Form 4562. Also, if you file Schedule C (Form 1040) and are claiming the standard mileage rate or actual vehicle expenses (except depreciation) and you are not required to file Form 4562 for any other reason, report vehicle information in Part IV of Schedule C and not on Form 4562.

You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.

Contacting your Taxpayer Advocate. The Taxpayer Advocate Service (TAS) is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should. Here are seven things every taxpayer should know about TAS:

• TAS is your voice at the IRS.
• Our service is free, confidential, and tailored to meet your needs.
• You may be eligible for TAS help if you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn't working as it should.
• TAS helps taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. This includes businesses as well as individuals.
• TAS employees know the IRS and how to navigate it. We will listen to your problem, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved.
• TAS has at least one local taxpayer advocate in every state, the District of Columbia, and Puerto Rico. You can call your local advocate, whose number is in your phone book, in Pub. 1546, Taxpayer Advocate Service -- Your Voice at the IRS, and on our website at www.irs.gov/advocate. You can also call our toll-free line at 1-877-777-4778 or TTY/TDD 1-800-829-4059.
• You can learn about your rights and responsibilities as a taxpayer by visiting our online tax toolkit at www.taxtoolkit.irs.gov.

Low income tax clinics (LITCs). The Low Income Taxpayer Clinic program serves individuals who have a problem with the IRS and whose income is below a certain level. LITCs are independent from the IRS. Most LITCs can provide representation before the IRS or in court on audits, tax collection disputes, and other issues for free or a small fee. If an individual's native language is not English, some clinics can provide multilingual information about taxpayer rights and responsibilities. For more information, see Publication 4134, Low Income Taxpayer Clinic List. This publication is available at www.irs.gov, by calling 1-800-TAX-FORM (1-800-829-3676), or at your local IRS office.

Free tax services. To find out what services are available, get Publication 910, IRS Guide to Free Tax Services. It contains a list of free tax information sources, including publications, services, and free tax education and assistance programs. It also has an index of 100 TeleTax topics (recorded tax information) you can listen to on your telephone.

Accessible versions of IRS published products are available on request in a variety of alternative formats for people with disabilities.

Free help with your return. Free help in preparing your return is available nationwide from IRS-trained volunteers. The Volunteer Income Tax Assistance (VITA) program is designed to help low-income taxpayers and the Tax Counseling for the Elderly (TCE) program is designed to assist taxpayers age 60 and older with their tax returns. Many VITA sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. To find the nearest VITA or TCE site, call 1-800-829-1040.

As part of the TCE program, AARP offers the Tax-Aide counseling program. To find the nearest AARP Tax-Aide site, call 1-888-227-7669 or visit AARP's website at www.aarp.org/money/taxaide.

For more information on these programs, go to www.irs.gov and enter the keyword "VITA" in the upper right-hand corner.

Internet. You can access the IRS website at www.irs.gov 24 hours a day, 7 days a week to:

• E-file your return. Find out about commercial tax preparation and e-file services available free to eligible taxpayers.
• Check the status of your 2009 refund. Go to www.irs.gov and click on Where's My Refund. Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Have your 2009 tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund.
• Download forms, instructions, and publications.
• Order IRS products online.
• Research your tax questions online.
• Search publications online by topic or keyword.
• Use the online Internal Revenue Code, Regulations, or other official guidance.
• View Internal Revenue Bulletins (IRBs) published in the last few years.
• Figure your withholding allowances using our withholding calculator online at www.irs.gov/individuals.
• Determine if Form 6251 must be filed by using our Alternative Minimum Tax (AMT) assistant.
• Sign up to receive local and national tax news by email.
• Get information on starting and operating a small business.

Phone. Many services are available by phone.

• Ordering forms, instructions, and publications. 1-800-TAX-FORM (1-800-829-3676) to order current-year forms, instructions, and publications and prior-year forms and instructions. You should receive your order within 10 days.
• Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.
• Solving problems. You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. An employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Call your local Taxpayer Assistance Center for an appointment. To find the number, go to www.irs.gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service.
• TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications.
• TeleTax topics. Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics.
• Refund information. To check the status of your 2009 refund, call 1-800-829-1954 during business hours or 1-800-829-4477 (automated refund information 24 hours a day, 7 days a week). Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Have your 2009 tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. Refunds are sent out weekly on Fridays. If you check the status of your refund and are not given the date it will be issued, please wait until the next week before checking back.
• Other refund information. To check the status of a prior year refund or amended return refund, call 1-800-829-1954.

Evaluating the quality of our telephone services. To ensure that IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. One method is for a second IRS representative to sometimes listen in on or record telephone calls. Another is to ask some callers to complete a short survey at the end of the call.

Walk-in. Many products and services are available on a walk-in basis.

• Products. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Some IRS offices, libraries, grocery stores, copy centers, city and county government offices, credit unions, and office supply stores have a collection of products available to print from a CD or photocopy from reproducible proofs. Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes.
• Services. You can walk in to your local Taxpayer Assistance Center every business day for personal, face-to-face tax help. An employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. If you need to resolve a tax problem, have questions about how the tax law applies to your individual tax return, or you are more comfortable talking with someone in person, visit your local Taxpayer Assistance Center where you can spread out your records and talk with an IRS representative face-to-face. No appointment is necessary -- just walk in. If you prefer, you can call your local Center and leave a message requesting an appointment to resolve a tax account issue. A representative will call you back within 2 business days to schedule an in-person appointment at your convenience. If you have an ongoing, complex tax account problem or a special need, such as a disability, an appointment can be requested. All other issues will be handled without an appointment. To find the number of your local office, go to www.irs.gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service.

Mail. You can send your order for forms, instructions, and publications to the address below and receive a response within 10 business days after your request is received.

Internal Revenue Service
1201 N. Mitsubishi Motorway
Bloomington, IL 61705-6613

DVD for tax products. You can order Publication 1796, IRS Tax Products DVD, and obtain:

• Current-year forms, instructions, and publications.
• Prior-year forms, instructions, and publications.
• Tax Map: an electronic research tool and finding aid.
• Tax law frequently asked questions.
• Tax Topics from the IRS telephone response system.
• Internal Revenue Code -- Title 26 of the U.S. Code.
• Fill-in, print, and save features for most tax forms.
• Internal Revenue Bulletins.
• Toll-free and email technical support.
• Two releases during the year.
  • The first release will ship the beginning of January 2010.
  • The final release will ship the beginning of March 2010.

Purchase the DVD from the National Technical Information Service (NTIS) at www.irs.gov/cdorders for $30 (no handling fee) or call 1-877-233-6767 toll free to buy the DVD for $30 (plus a $6 handling fee).
General Depreciation System (GDS)

Alternative Depreciation System (ADS)

Chart 3. Income Inclusion Amount Rates
               for MACRS Leased Listed Property
 _______________________________________________
                                     Table
 _______________________________________________
 Amount A Percentages                A-19
 _______________________________________________
 Amount B Percentages                A-20
 _______________________________________________

Table A-1. 3-, 5-, 7-, 10-, 15-, and 20-Year Property
                     Half-Year Convention
 _________________________________________________________
              Depreciation rate for recovery period
  Year  __________________________________________________
         3-year  5-year  7-year  10-year  15-year  20-year
 _________________________________________________________
   1     33.33%  20.00%  14.29%  10.00%    5.00%    3.750%
   2     44.45   32.00   24.49   18.00     9.50     7.219
   3     14.81   19.20   17.49   14.40     8.55     6.677
   4      7.41   11.52   12.49   11.52     7.70     6.177
   5             11.52    8.93    9.22     6.93     5.713

   6              5.76    8.92    7.37     6.23     5.285
   7                      8.93    6.55     5.90     4.888
   8                      4.46    6.55     5.90     4.522
   9                              6.56     5.91     4.462
  10                              6.55     5.90     4.461

  11                              3.28     5.91     4.462
  12                                       5.90     4.461
  13                                       5.91     4.462
  14                                       5.90     4.461
  15                                       5.91     4.462

  16                                       2.95     4.461
  17                                                4.462
  18                                                4.461
  19                                                4.462
  20                                                4.461

  21                                                2.231
 _________________________________________________________

Table A-2. 3-, 5-, 7-, 10-, 15-, and 20-Year Property
                       Mid-Quarter Convention
              Placed in Service in First Quarter
 _________________________________________________________
              Depreciation rate for recovery period
  Year  __________________________________________________
         3-year  5-year  7-year  10-year  15-year  20-year
 _________________________________________________________
   1     58.33%  35.00%  25.00%  17.50%    8.75%    6.563%
   2     27.78   26.00   21.43   16.50     9.13     7.000
   3     12.35   15.60   15.31   13.20     8.21     6.482
   4      1.54   11.01   10.93   10.56     7.39     5.996
   5             11.01    8.75    8.45     6.65     5.546

   6              1.38    8.74    6.76     5.99     5.130
   7                      8.75    6.55     5.90     4.746
   8                      1.09    6.55     5.91     4.459
   9                              6.56     5.90     4.459
  10                              6.55     5.91     4.459

  11                              0.82     5.90     4.459
  12                                       5.91     4.460
  13                                       5.90     4.459
  14                                       5.91     4.460
  15                                       5.90     4.459

  16                                       0.74     4.460
  17                                                4.459
  18                                                4.460
  19                                                4.459
  20                                                4.460

  21                                                0.565
 _________________________________________________________

Table A-3. 3-, 5-, 7-, 10-, 15-, and 20-Year Property
                       Mid-Quarter Convention
              Placed in Service in Second Quarter
 _________________________________________________________
              Depreciation rate for recovery period
  Year  __________________________________________________
         3-year  5-year  7-year  10-year  15-year  20-year
 _________________________________________________________
   1     41.67%  25.00%  17.85%  12.50%    6.25%    4.688%
   2     38.89   30.00   23.47   17.50     9.38     7.148
   3     14.14   18.00   16.76   14.00     8.44     6.612
   4      5.30   11.37   11.97   11.20     7.59     6.116
   5             11.37    8.87    8.96     6.83     5.658

   6              4.26    8.87    7.17     6.15     5.233
   7                      8.87    6.55     5.91     4.841
   8                      3.34    6.55     5.90     4.478
   9                              6.56     5.91     4.463
  10                              6.55     5.90     4.463

  11                              2.46     5.91     4.463
  12                                       5.90     4.463
  13                                       5.91     4.463
  14                                       5.90     4.463
  15                                       5.91     4.462

  16                                       2.21     4.463
  17                                                4.462
  18                                                4.463
  19                                                4.462
  20                                                4.463

  21                                                1.673
 _________________________________________________________

Table A-4. 3-, 5-, 7-, 10-, 15-, and 20-Year Property
                       Mid-Quarter Convention
              Placed in Service in Third Quarter
 _________________________________________________________
              Depreciation rate for recovery period
  Year  __________________________________________________
         3-year  5-year  7-year  10-year  15-year  20-year
 _________________________________________________________
   1     25.00%  15.00%  10.71%   7.50%    3.75%    2.813%
   2     50.00   34.00   25.51   18.50     9.63     7.289
   3     16.67   20.40   18.22   14.80     8.66     6.742
   4      8.33   12.24   13.02   11.84     7.80     6.237
   5             11.30    9.30    9.47     7.02     5.769

   6              7.06    8.85    7.58     6.31     5.336
   7                      8.86    6.55     5.90     4.936
   8                      5.53    6.55     5.90     4.566
   9                              6.56     5.91     4.460
  10                              6.55     5.90     4.460

  11                              4.10     5.91     4.460
  12                                       5.90     4.460
  13                                       5.91     4.461
  14                                       5.90     4.460
  15                                       5.91     4.461

  16                                       3.69     4.460
  17                                                4.461
  18                                                4.460
  19                                                4.461
  20                                                4.460

  21                                                2.788
 _________________________________________________________

Table A-5. 3-, 5-, 7-, 10-, 15-, and 20-Year Property
                       Mid-Quarter Convention
              Placed in Service in Fourth Quarter
 _________________________________________________________
               Depreciation rate for recovery period
  Year  __________________________________________________
        3-year  5-year  7-year  10-year  15-year  20-year
 _________________________________________________________
   1     8.33%   5.00%   3.57%   2.50%     1.25%    0.938%
   2    61.11   38.00   27.55   19.50      9.88     7.430
   3    20.37   22.80   19.68   15.60      8.89     6.872
   4    10.19   13.68   14.06   12.48      8.00     6.357
   5            10.94   10.04    9.98      7.20     5.880

   6             9.58    8.73    7.99      6.48     5.439
   7                     8.73    6.55      5.90     5.031
   8                     7.64    6.55      5.90     4.654
   9                             6.56      5.90     4.458
  10                             6.55      5.91     4.458

  11                             5.74      5.90     4.458
  12                                       5.91     4.458
  13                                       5.90     4.458
  14                                       5.91     4.458
  15                                       5.90     4.458

  16                                       5.17     4.458
  17                                                4.458
  18                                                4.459
  19                                                4.458
  20                                                4.459

  21                                                3.901
 _________________________________________________________

RATES TO FIGURE INCLUSION AMOUNTS FOR LEASED LISTED PROPERTY
Qualified Indian Reservation Property Tables

Table A-21. 2-Year Qualified Indian Reservation Property
             Half-Year and Mid-Quarter Conventions
 ________________________________________________
        Half-Year
 Year  Convention   Q-4     Q-4     Q-4     Q-4
 ________________________________________________
   1     12.50%    12.50%  12.50%  12.50%  12.50%
 ________________________________________________
   2     87.50     87.50   87.50   87.50   87.50
 ________________________________________________

Table A-22. 4-Year Qualified Indian Reservation Property
             Half-Year and Mid-Quarter Conventions
 ________________________________________________
        Half-Year
 Year  Convention   Q-4     Q-4     Q-4     Q-4
 ________________________________________________
   1     25.00%    43.75%  31.25%  18.75%   6.25%
 ________________________________________________
   2     37.50     28.13   34.37   40.63   46.87
 ________________________________________________
   3     18.75     14.06   17.19   20.31   23.44
 ________________________________________________
   4     12.50     12.50   12.50   12.50   12.50
 ________________________________________________
   5      6.25      1.56    4.69    7.81   10.94
 ________________________________________________

Table A-23. 6-Year Qualified Indian Reservation Property
             Half-Year and Mid-Quarter Conventions
 ________________________________________________
        Half-Year
 Year  Convention   Q-4     Q-4     Q-4     Q-4
 ________________________________________________
   1     16.67%    29.17%  20.83%  12.50%   4.17%
 ________________________________________________
   2     27.78     23.61   26.39   29.17   31.94
 ________________________________________________
   3     18.52     15.74   17.59   19.44   21.30
 ________________________________________________
   4     12.35     10.49   11.73   12.96   14.20
 ________________________________________________
   5      9.87      9.88    9.88    9.88    9.87
 ________________________________________________
   6      9.87      9.88    9.88    9.88    9.88
 ________________________________________________
   7      4.94      1.23    3.70    6.17    8.64
 ________________________________________________

The Table of Class Lives and Recovery Periods has two sections. The first section, Specific Depreciable Assets Used In All Business Activities, Except As Noted, generally lists assets used in all business activities. It is shown as Table B-1. The second section, Depreciable Assets Used In The Following Activities, describes assets used only in certain activities. It is shown as Table B-2.

How To Use the Tables

You will need to look at both Table B-1 and B-2 to find the correct recovery period. Generally, if the property is listed in Table B-1 you use the recovery period shown in that table. However, if the property is specifically listed in Table B-2 under the type of activity in which it is used, you use the recovery period listed under the activity in that table. Use the tables in the order shown below to determine the recovery period of your depreciable property.

Table B-1. Check Table B-1 for a description of the property. If it is described in Table B-1, also check Table B-2 to find the activity in which the property is being used. If the activity is described in Table B-2, read the text (if any) under the title to determine if the property is specifically included in that asset class. If it is, use the recovery period shown in the appropriate column of Table B-2 following the description of the activity. If the activity is not described in Table B-2 or if the activity is described but the property either is not specifically included in or is specifically excluded from that asset class, then use the recovery period shown in the appropriate column following the description of the property in Table B-1.

Tax-exempt use property subject to a lease. The recovery period for ADS cannot be less than 125 percent of the lease term for any property leased under a leasing arrangement to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership).

Table B-2. If the property is not listed in Table B-1, check Table B-2 to find the activity in which the property is being used and use the recovery period shown in the appropriate column following the description.

Property not in either table. If the activity or the property is not included in either table, check the end of Table B-2 to find Certain Property for Which Recovery Periods Assigned. This property generally has a recovery period of 7 years for GDS or 12 years for ADS. See Which Property Class Applies Under GDS and Which Recovery Period Applies in chapter 4 for the class lives or the recovery periods for GDS and ADS for the following.

• Residential rental property and nonresidential real property (also see Appendix A, Chart 2).
• Qualified rent-to-own property.
• A motorsport entertainment complex placed in service before January 1, 2010.
• Any retail motor fuels outlet.
• Any qualified leasehold improvement property placed in service before January 1, 2010.
• Any qualified restaurant property placed in service before January 1, 2010.
• Initial clearing and grading land improvements for gas utility property and electric utility transmission and distribution plants.
• Any water utility property.
• Certain electric transmission property used in the transmission at 69 or more kilovolts of electricity for sale and placed in service after April 11, 2005.
• Natural gas gathering and distribution lines placed in service after April 11, 2005.

Example 1. Richard Green is a paper manufacturer. During the year, he made substantial improvements to the land on which his paper plant is located. He checks Table B-1 and finds land improvements under asset class 00.3. He then checks Table B-2 and finds his activity, paper manufacturing, under asset class 26.1, Manufacture of Pulp and Paper. He uses the recovery period under this asset class because it specifically includes land improvements. The land improvements have a 13-year class life and a 7-year recovery period for GDS. If he elects to use ADS, the recovery period is 13 years. If Richard only looked at Table B-1, he would select asset class 00.3, Land Improvements, and incorrectly use a recovery period of 15 years for GDS or 20 years for ADS.

Example 2. Sam Plower produces rubber products. During the year, he made substantial improvements to the land on which his rubber plant is located. He checks Table B-1 and finds land improvements under asset class 00.3. He then checks Table B-2 and finds his activity, producing rubber products, under asset class 30.1, Manufacture of Rubber Products. Reading the headings and descriptions under asset class 30.1, Sam finds that it does not include land improvements. Therefore, Sam uses the recovery period under asset class 00.3. The land improvements have a 20-year class life and a 15-year recovery period for GDS. If he elects to use ADS, the recovery period is 20 years.

Example 3. Pam Martin owns a retail clothing store. During the year, she purchased a desk and a cash register for use in her business. She checks Table B-1 and finds office furniture under asset class 00.11. Cash registers are not listed in any of the asset classes in Table B-1. She then checks Table B-2 and finds her activity, retail store, under asset class 57.0, Distributive Trades and Services, which includes assets used in wholesale and retail trade. This asset class does not specifically list office furniture or a cash register. She looks back at Table B-1 and uses asset class 00.11 for the desk. The desk has a 10-year class life and a 7-year recovery period for GDS. If she elects to use ADS, the recovery period is 10 years. For the cash register, she uses asset class 57.0 because cash registers are not listed in Table B-1 but it is an asset used in her retail business. The cash register has a 9-year class life and a 5-year recovery period for GDS. If she elects to use the ADS method, the recovery period is 9 years.

Table B-1. Table of Class Lives and Recovery Periods
 ______________________________________________________________________
                                                   Recovery Periods
                                                      (in years)
                                               ________________________
 Asset                                         Class Life    GDS
 class   Description of assets included        (in years)  (MACRS)  ADS
 ______________________________________________________________________
      SPECIFIC DEPRECIABLE ASSETS USED IN ALL
      BUSINESS ACTIVITIES, EXCEPT AS NOTED:
 ______________________________________________________________________
 00.11   Office Furniture, Fixtures, and
         Equipment:

         Includes furniture and fixtures            10        7     10
         that are not a structural component
         of a building. Includes such
         assets as desks, files, safes, and
         communications equipment. Does not
         include communications equipment
         that is included in other classes.
 ______________________________________________________________________
 00.12   Information Systems:

         Includes computers and their                6        5      5
         peripheral equipment used in
         administering normal business
         transactions and the maintenance
         of business records, their retrieval
         and analysis.

         Information systems are defined as:

         1) Computers: A computer is a
         programmable electronically
         activated device capable of
         accepting information, applying
         prescribed processes to the
         information, and supplying the
         results of these processes with or
         without human intervention. It
         usually consists of a central
         processing unit containing extensive
         storage, logic, arithmetic, and
         control capabilities. Excluded from
         this category are adding machines,
         electronic desk calculators, etc.,
         and other equipment described in
         class 00.13.

         2) Peripheral equipment consists of
         the auxiliary machines which are
         designed to be placed under control
         of the central processing unit.
         Nonlimiting examples are: Card
         readers, card punches, magnetic tape
         feeds, high speed printers, optical
         character readers, tape cassettes,
         mass storage units, paper tape
         equipment, keypunches, data entry
         devices, teleprinters, terminals,
         tape drives, disc drives, disc
         files, disc packs, visual image
         projector tubes, card sorters,
         plotters, and collators. Peripheral
         equipment may be used on-line or
         off-line. Does not incude equipment
         that is an integral part of other
         capital equipment that is included
         in other classes of economic
         activity, i.e., computers used
         primarily for process or production
         control, switching, channeling, and
         automating distributive trades and
         services such as point of sale (POS)
         computer systems. Also, does not
         include equipment of a kind used
         primarily for amusement or
         entertainment of the user.
 ______________________________________________________________________
 00.13   Data Handling Equipment; except
         Computers:

         Includes only typewriters,                  6        5      6
         calculators, adding and accounting
         machines, copiers, and duplicating
         equipment.
 ______________________________________________________________________
 00.21   Airplanes (airframes and engines),          6        5      6
         except those used in commercial or
         contract carrying of passengers or
         freight, and all helicopters
         (airframes and engines)
 ______________________________________________________________________
 00.22   Automobiles, Taxis                          3        5      5
 ______________________________________________________________________
 00.23   Buses                                       9        5      9
 ______________________________________________________________________
 00.241  Light General Purpose Trucks:

         Includes trucks for use over the            4        5      5
         road (actual weight less than
         13,000 pounds)
 ______________________________________________________________________
 00.242  Heavy General Purpose Trucks:

         Includes heavy general purpose              6        5      6
         trucks, concrete ready mix-trucks,
         and ore trucks, for use over the
         road (actual unloaded weight
         13,000 pounds or more)
 ______________________________________________________________________
 00.25   Railroad Cars and Locomotives,             15        7     15
         except those owned by railroad
         transportation companies
 ______________________________________________________________________
 00.26   Tractor Units for Use Over-The-Road         4        3      4
 ______________________________________________________________________
 00.27   Trailers and Trailer-Mounted                6        5      6
         Containers
 ______________________________________________________________________
 00.28   Vessels, Barges, Tugs, and Similar         18       10     18
         Water Transportation Equipment,
         except those used in marine
         construction
 ______________________________________________________________________
 00.3    Land Improvements:

         Includes improvements directly to or       20       15     20
         added to land, whether such
         improvements are section 1245
         property or section 1250 property,
         provided such improvements are
         depreciable. Examples of such assets
         might include sidewalks, roads,
         canals, waterways, drainage
         facilities, sewers (not including
         municipal sewers in Class 51),
         wharves and docks, bridges, fences,
         landscaping shrubbery, or radio and
         television transmitting towers.
         Does not include land improvements
         that are explicitly included in any
         other class, and buildings and
         structural components as defined in
         section 1.48-1(e) of the
         regulations. Excludes public utility
         initial clearing and grading land
         improvements as specified in Rev.
         Rul. 72-403, 1972-2 C.B. 102.
 ______________________________________________________________________
 00.4    Industrial Steam and Electric
         Generation and/or Distribution
         Systems:

         Includes assets, whether such assets       22       15     22
         are section 1245 property or 1250
         property, providing such assets are
         depreciable, used in the production
         and/or distribution of electricity
         with rated total capacity in excess
         of 500 Kilowatts and/or assets used
         in the production and/or
         distribution of steam with rated
         total capacity in excess of 12,500
         pounds per hour for use by the
         taxpayer in its industrial
         manufacturing process or plant
         activity and not ordinarily
         available for sale to others. Does
         not include buildings and
         structural components as defined
         in section 1.48-1(e) of the
         regulations. Assets used to
         generate and/or distribute
         electricity or steam of the type
         described above, but of lesser
         rated capacity, are not included,
         but are included in the appropriate
         manufacturing equipment classes
         elsewhere specified. Also includes
         electric generating and steam
         distribution assets, which may
         utilize steam produced by a waste
         reduction and resource recovery
         plant, used by the taxpayer in its
         industrial manufacturing process or
         plant activity. Steam and chemical
         recovery boiler systems used for the
         recovery and regeneration of
         chemicals used in manufacturing,
         with rated capacity in excess of that
         described above, with specifically
         related distribution and return
         systems are not included but are
         included in appropriate
         manufacturing equipment classes
         elsewhere specified. An example
         of an excluded steam and chemical
         recovery boiler system is that
         used in the pulp and paper
         manufacturing equipment classes
         elsewhere specified. An example
         of an excluded steam and
         chemical recovery boiler system is
         that used in the pulp and paper
         manufacturing industry.
 ______________________________________________________________________

Table B-2. Table of Class Lives and Recovery Periods
 ______________________________________________________________________
                                              Recovery Periods
                                                 (in years)
                                    ___________________________________
 Asset   Description of assets       Class Life    GDS
 class   included                    (in years)  (MACRS)       ADS
 ______________________________________________________________________
     DEPRECIABLE ASSETS USED IN
     THE FOLLOWING ACTIVITIES:
 ______________________________________________________________________
 01.1    Agriculture:

         Includes machinery and          10         7           10
         equipment, grain bins,
         and fences but no other
         land improvements, that
         are used in the
         production of crops or
         plants, vines, and trees;
         livestock; the operation
         of farm dairies,
         nurseries, greenhouses,
         sod farms, mushroom
         cellars, cranberry bogs,
         apiaries, and fur farms;
         the performance of
         agriculture, animal
         husbandry, and
         horticultural services.
 ______________________________________________________________________
 01.11   Cotton Ginning Assets           12         7           12
 ______________________________________________________________________
 01.21   Cattle, Breeding or Dairy        7         5            7
 ______________________________________________________________________
 01.221  Any breeding or work            10         7           10
         horse that is 12 years
         old or less at the time
         it is placed in service^**
 ______________________________________________________________________
 01.222  Any breeding or work horse      10         3           10
         that is more than 12 years
         old at the time it is
         placed in service^**
 ______________________________________________________________________
 01.223  Any race horse that is           ^*         3           12
         more than 2 years old at
         the time it is placed in
         service^**
 ______________________________________________________________________
 01.224  Any horse that is more           ^*         3           12
         than 12 years old at the
         time it is placed in
         service and that is
         neither a race horse nor
         a horse described in class
         01.222^**
 ______________________________________________________________________
 01.225  Any horse not described in       ^*         7           12
         classes 01.221, 01.222,
         01.223, or 01.224
 ______________________________________________________________________
 01.23   Hogs, Breeding                   3         3            3
 ______________________________________________________________________
 01.24   Sheep and Goats, Breeding        5         5            5
 ______________________________________________________________________
 01.3    Farm buildings except           25        20           25
         structures included in
         Class 01.4
 ______________________________________________________________________
 01.4    Single purpose                  15      10^***          15
         agricultural or
         horticultural structures
         (within the meaning of
         section 168(i)(13) of
         the Code)
 ______________________________________________________________________
 10.0    Mining:

         Includes assets used in         10         7           10
         the mining and quarrying
         of metallic and
         nonmetallic minerals
         (including sand,
         gravel, stone, and clay)
         and the milling,
         beneficiation and other
         primary preparation of
         such materials.
 ______________________________________________________________________
 13.0    Offshore Drilling:

         Includes assets used in        7.5         5          7.5
         offshore drilling for oil
         and gas such as floating,
         self-propelled and other
         drilling vessels, barges,
         platforms, and drilling
         equipment and support
         vessels such as tenders,
         barges, towboats and
         crewboats. Excludes oil
         and gas production assets.
 ______________________________________________________________________
 13.1    Drilling of Oil and Gas
         Wells:

         Includes assets used in          6         5            6
         the drilling of onshore
         oil and gas wells and the
         provision of geophysical
         and other exploration
         services; and the
         provision of such oil and
         gas field services as
         chemical treatment,
         plugging and abandoning
         of wells and cementing or
         perforating well casings.
         Does not include assets
         used in the performance of
         any of these activities
         and services by integrated
         petroleum and natural gas
         producers for their own
         account.
 ______________________________________________________________________
 13.2    Exploration for and
         Production of Petroleum
         and Natural Gas Deposits:

         Includes assets used by         14          7           14
         petroleum and natural gas
         producers for drilling of
         wells and production of
         petroleum and natural gas,
         including gathering
         pipelines and related
         storage facilities. Also
         includes petroleum and
         natural gas offshore
         transportation facilities
         used by producers and
         others consisting of
         platforms (other than
         drilling platforms
         classified in Class
         13.0), compression or
         pumping equipment, and
         gathering and transmission
         lines to the first onshore
         transshipment facility.
         The assets used in the
         first onshore
         transshipment facility
         are also included and
         consist of separation
         equipment (used for
         separation of natural
         gas, liquids, and in
         Class 49.23), and liquid
         holding or storage
         facilities (other than
         those classified in Class
         49.25). Does not include
         support vessels.
 ______________________________________________________________________
 13.3    Petroleum Refining:

         Includes assets used for        16         10          16
         the distillation,
         fractionation, and
         catalytic cracking of
         crude petroleum into
         gasoline and its other
         components.
 ______________________________________________________________________
 15.0    Construction:

         Includes assets used in          6         5            6
         construction by general
         building, special trade,
         heavy and marine
         construction contractors,
         operative and investment
         builders, real estate
         subdividers and
         developers, and others
         except railroads.
 ______________________________________________________________________
 20.1    Manufacture of Grain and
         Grain Mill Products:

         Includes assets used in         17        10           17
         the production of flours,
         cereals, livestock feeds,
         and other grain and grain
         mill products.
 ______________________________________________________________________
 20.2    Manufacture of Sugar and
         Sugar Products:

         Includes assets used in the     18        10           18
         production of raw sugar,
         syrup, or finished sugar
         from sugar cane or sugar
         beets.
 ______________________________________________________________________
 20.3    Manufacture of Vegetable
         Oils and Vegetable Oil
         Products:

         Includes assets used in         18        10           18
         the production of oil from
         vegetable materials and
         the manufacture of related
         vegetable oil products.
 ______________________________________________________________________
 20.4    Manufacture of Other Food
         and Kindred Products:

         Includes assets used in the     12         7           12
         production of foods and
         beverages not included in
         classes 20.1, 20.2 and 20.3.
 ______________________________________________________________________
 20.5    Manufacture of Food and
         Beverages--Special
         Handling Devices:

         Includes assets defined as       4         3            4
         specialized materials
         handling devices such as
         returnable pallets,
         palletized containers,
         and fish processing
         equipment including boxes,
         baskets, carts, and
         flaking trays used in
         activities as defined in
         classes 20.1, 20.2, 20.3
         and 20.4. Does not include
         general purpose small
         tools such as wrenches and
         drills, both hand and
         power-driven, and other
         general purpose equipment
         such as conveyors,
         transfer equipment, and
         materials handling devices.
 ______________________________________________________________________
 21.0    Manufacture of Tobacco
         and Tobacco Products:

         Includes assets used in         15         7           15
         the production of
         cigarettes, cigars,
         smoking and chewing
         tobacco, snuff, and
         other tobacco products.
 ______________________________________________________________________
 22.1    Manufacture of Knitted
         Goods:

         Includes assets used in        7.5         5          7.5
         the production of knitted
         and netted fabrics and
         lace. Assets used in yarn
         preparation, bleaching,
         dyeing, printing, and
         other similar finishing
         processes, texturing, and
         packaging, are elsewhere
         classified.
 ______________________________________________________________________
 22.2    Manufacture of Yarn,
         Thread, and Woven Fabric:

         Includes assets used in         11         7           11
         the production of spun
         yarns including the
         preparing, blending,
         spinning, and twisting of
         fibers into yarns and
         threads, the preparation
         of yarns such as twisting,
         warping, and winding, the
         production of covered
         elastic yarn and thread,
         cordage, woven fabric,
         tire fabric, braided
         fabric, twisted jute for
         packaging, mattresses,
         pads, sheets, and
         industrial belts, and the
         processing of textile mill
         waste to recover fibers,
         flocks, and shoddies.
         Assets used to manufacture
         carpets, man-made fibers,
         and nonwovens, and assets
         used in texturing,
         bleaching, dyeing,
         printing, and other
         similar finishing
         processes, are elsewhere
         classified.
 ______________________________________________________________________
 22.3    Manufacture of Carpets and
         Dyeing, Finishing, and
         Packaging of Textile
         Products and Manufacture
         of Medical and Dental
         Supplies:

         Includes assets used in          9         5            9
         the production of carpets,
         rugs, mats, woven carpet
         backing, chenille, and
         other tufted products, and
         assets used in the joining
         together of backing with
         carpet yarn or fabric.
         Includes assets used in
         washing, scouring,
         bleaching, dyeing,
         printing, drying, and
         similar finishing
         processes applied to
         textile fabrics, yarns,
         threads, and other textile
         goods. Includes assets
         used in the production
         and packaging of textile
         products, other than
         apparel, by creasing,
         forming, trimming,
         cutting, and sewing, such
         as the preparation of
         carpet and fabric samples,
         or similar joining
         together processes (other
         than the production of
         scrim reinforced paper
         products and laminated
         paper products) such as
         the sewing and folding of
         hosiery and panty hose,
         and the creasing, folding,
         trimming, and cutting of
         fabrics to produce
         nonwoven products, such as
         disposable diapers and
         sanitary products. Also
         includes assets used in
         the production of medical
         and dental supplies other
         than drugs and medicines.
         Assets used in the
         manufacture of nonwoven
         carpet backing, and hard
         surface floor covering
         such as tile, rubber, and
         cork, are elsewhere
         classified.
 ______________________________________________________________________
 22.4    Manufacture of Textile
         Yarns:

         Includes assets used in          8         5            8
         the processing of yarns to
         impart bulk and/or stretch
         properties to the yarn.
         The principal machines
         involved are falsetwist,
         draw, beam-to-beam, and
         stuffer box texturing
         equipment and related
         highspeed twisters and
         winders. Assets, as
         described above, which
         are used to further
         process man-made fibers
         are elsewhere classified
         when located in the same
         plant in an integrated
         operation with man-made
         fiber producing assets.
         Assets used to manufacture
         man-made fibers and assets
         used in bleaching, dyeing,
         printing, and other
         similar finishing
         processes, are elsewhere
         classified.
 ______________________________________________________________________
 22.5    Manufacture of Nonwoven
         Fabrics:

         Includes assets used in         10         7           10
         the production of nonwoven
         fabrics, felt goods
         including felt hats,
         padding, batting, wadding,
         oakum, and fillings, from
         new materials and from
         textile mill waste.
         Nonwoven fabrics are
         defined as fabrics (other
         than reinforced and
         laminated composites
         consisting of nonwovens
         and other products)
         manufactured by bonding
         natural and/or synthetic
         fibers and/or filaments
         by means of induced
         mechanical interlocking,
         fluid entanglement,
         chemical adhesion,
         thermal or solvent
         reaction, or by
         combination thereof
         other than natural
         hydration bonding as
         ocurs with natural
         cellulose fibers. Such
         means include resin
         bonding, web bonding, and
         melt bonding. Specifically
         includes assets used to
         make flocked and needle
         punched products other
         than carpets and rugs.
         Assets, as described
         above, which are used to
         manufacture nonwovens are
         elsewhere classified when
         located in the same plant
         in an integrated operation
         with man-made fiber
         producing assets. Assets
         used to manufacture
         man-made fibers and assets
         used in bleaching, dyeing,
         printing, and other
         similar finishing
         processes, are elsewhere
         classified.
 ______________________________________________________________________
 23.0    Manufacture of Apparel and
         Other Finished Products:

         Includes assets used in          9         5            9
         the production of clothing
         and fabricated textile
         products by the cutting
         and sewing of woven
         fabrics, other textile
         products, and furs; but
         does not include assets
         used in the manufacture
         of apparel from rubber and
         leather.
 ______________________________________________________________________
 24.1    Cutting of Timber:

         Includes logging machinery       6         5            6
         and equipment and
         roadbuilding equipment
         used by logging and
         sawmill operators and pulp
         manufacturers for their
         own account.
 ______________________________________________________________________
 24.2    Sawing of Dimensional
         Stock from Logs:

         Includes machinery and          10         7           10
         equipment installed in
         permanent or well
         established sawmills.
 ______________________________________________________________________
 24.3    Sawing of Dimensional
         Stock from Logs:

         Includes machinery and           6         5            6
         equipment in sawmills
         characterized by temporary
         foundations and a lack, or
         minimum amount, of
         lumberhandling, drying,
         and residue disposal
         equipment and facilities.
 ______________________________________________________________________
 24.4    Manufacture of Wood
         Products, and Furniture:

         Includes assets used in         10         7           10
         the production of plywood,
         hardboard, flooring,
         veneers, furniture, and
         other wood products,
         including the treatment of
         poles and timber.
 ______________________________________________________________________
 26.1    Manufacture of Pulp and
         Paper:

         Includes assets for pulp        13         7           13
         materials handling and
         storage, pulp mill
         processing, bleach
         processing, paper and
         paperboard manufacturing,
         and on-line finishing.
         Includes pollution control
         assets and all land
         improvements associated
         with the factory site or
         production process such as
         effluent ponds and canals,
         provided such improvements
         are depreciable but does
         not include buildings and
         structural components as
         defined in section
         1.48-1(e)(1) of the
         regulations. Includes
         steam and chemical
         recovery boiler systems,
         with any rated capacity,
         used for the recovery and
         regeneration of chemicals
         used in manufacturing.
         Does not include assets
         used either in pulpwood
         logging, or in the
         manufacture of hardboard.
 _____________________________________________________________________
 26.2    Manufacture of Converted
         Paper, Paperboard, and
         Pulp Products:

         Includes assets used for        10         7           10
         modification, or
         remanufacture of paper and
         pulp into converted
         products, such as paper
         coated off the paper
         machine, paper bags, paper
         boxes, cartons and
         envelopes. Does not
         include assets used for
         manufacture of nonwovens
         that are elsewhere
         classified.
 ______________________________________________________________________
 27.0    Printing, Publishing, and
         Allied Industries:

         Includes assets used in         11         7           11
         printing by one or more
         processes, such as
         letter-press, lithography,
         gravure, or screen; the
         performance of services
         for the printing trade,
         such as bookbinding,
         typesetting, engraving,
         photo-engraving, and
         electrotyping; and the
         publication of newspapers,
         books, and periodicals.
 ______________________________________________________________________
 28.0    Manufacture of Chemicals
         and Allied Products:

         Includes assets used to        9.5         5           9.5
         manufacture basic organic
         and inorganic chemicals;
         chemical products to be
         used in further
         manufacture, such as
         synthetic fibers and
         plastics materials; and
         finished chemical
         products. Includes assets
         used to further process
         man-made fibers, to
         manufacture plastic film,
         and to manufacture
         nonwoven fabrics, when
         such assets are located in
         the same plant in an
         integrated operation with
         chemical products
         producing assets. Also
         includes assets used to
         manufacture photographic
         supplies, such as film,
         photographic paper,
         sensitized photographic
         paper, and developing
         chemicals. Includes all
         land improvements
         associated with plant site
         or production processes,
         such as effluent ponds and
         canals, provided such land
         improvements are
         depreciable but does not
         include buildings and
         structural components as
         defined in section
         1.48-1(e) of the
         regulations. Does not
         include assets used in
         the manufacture of
         finished rubber and
         plastic products or in the
         production of natural gas
         products, butane, propane,
         and by-products of natural
         gas production plants.
 ______________________________________________________________________
 30.1    Manufacture of Rubber
         Products:

         Includes assets used for        14         7           14
         the production of products
         from natural, synthetic,
         or reclaimed rubber, gutta
         percha, balata, or gutta
         siak, such as tires,
         tubes, rubber footwear,
         mechanical rubber goods,
         heels and soles, flooring,
         and rubber sundries; and
         in the recapping,
         retreading, and rebuilding
         of tires.
 ______________________________________________________________________
 30.11   Manufacture of Rubber
         Products--Special Tools and
         Devices:

         Includes assets defined as       4         3            4
         special tools, such as
         jigs, dies, mandrels,
         molds, lasts, patterns,
         specialty containers,
         pallets, shells; and tire
         molds, and accessory parts
         such as rings and insert
         plates used in activities
         as defined in class 30.1.
         Does not include tire
         building drums and
         accessory parts and
         general purpose small
         tools such as wrenches
         and drills, both power
         and hand-driven, and other
         general purpose equipment
         such as conveyors and
         transfer equipment.
 ______________________________________________________________________
 30.2    Manufacture of Finished
         Plastic Products:

         Includes assets used in         11         7           11
         the manufacture of
         plastics products and the
         molding of primary
         plastics for the trade.
         Does not include assets
         used in the manufacture of
         basic plastics materials
         nor the manufacture of
         phonograph records.
 ______________________________________________________________________
 30.21   Manufacture of Finished
         Plastic Products--Special
         Tools:

         Includes assets defined as     3.5         3           3.5
         special tools, such as
         jigs, dies, fixtures,
         molds, patterns, gauges,
         and specialty transfer and
         shipping devices, used in
         activities as defined in
         class 30.2. Special tools
         are specifically designed
         for the production or
         processing of particular
         parts and have no
         significant utilitarian
         value and cannot be
         adapted to further or
         different use after
         changes or improvements
         are made in the model
         design of the particular
         part produced by the
         special tools. Does not
         include general purpose
         small tools such as
         wrenches and drills, both
         hand and power-driven, and
         other general purpose
         equipment such as
         conveyors, transfer
         equipment, and materials
         handling devices.
 ______________________________________________________________________
 31.0    Manufacture of Leather and
         Leather Products:

         Includes assets used in         11         7           11
         the tanning, currying, and
         finishing of hides and
         skins; the processing of
         fur pelts; and the
         manufacture of finished
         leather products, such as
         footwear, belting,
         apparel, and luggage.
 ______________________________________________________________________
 32.1    Manufacture of Glass
         Products:

         Includes assets used in         14         7           14
         the production of flat,
         blown, or pressed products
         of glass, such as float
         and window glass, glass
         containers, glassware and
         fiberglass. Does not
         include assets used in the
         manufacture of lenses.
 ______________________________________________________________________
 32.11   Manufacture of Glass
         Products--Special Tools:

         Includes assets defined as     2.5         3           2.5
         special tools such as
         molds, patterns, pallets,
         and specialty transfer and
         shipping devices such as
         steel racks to transport
         automotive glass, used in
         activities as defined in
         class 32.1. Special tools
         are specifically designed
         for the production or
         processing of particular
         parts and have no
         significant utilitarian
         value and cannot be
         adapted to further or
         different use after
         changes or improvements
         are made in the model
         design of the particular
         part produced by the
         special tools. Does not
         include general purpose
         small tools such as
         wrenches and drills, both
         hand and power-driven, and
         other general purpose
         equipment such as
         conveyors, transfer
         equipment, and materials
         handling devices.
 ______________________________________________________________________
 32.2    Manufacture of Cement:

         Includes assets used in         20        15           20
         the production of cement,
         but does not include
         assets used in the
         manufacture of concrete
         and concrete products nor
         in any mining or
         extraction process.
 ______________________________________________________________________
 32.3    Manufacture of Other Stone
         and Clay Products:

         Includes assets used in         15         7           15
         the manufacture of
         products from materials in
         the form of clay and
         stone, such as brick,
         tile, and pipe; pottery
         and related products, such
         as vitreous-china,
         plumbing fixtures,
         earthenware and ceramic
         insulating materials; and
         also includes assets used
         in manufacture of concrete
         and concrete products.
         Does not include assets
         used in any mining or
         extraction processes.
 ______________________________________________________________________
 33.2    Manufacture of Primary
         Nonferrous Metals:

         Includes assets used in         14         7           14
         the smelting, refining,
         and electrolysis of
         nonferrous metals from
         ore, pig, or scrap, the
         rolling, drawing, and
         alloying of nonferrous
         metals; the manufacture of
         castings, forgings, and
         other basic products of
         nonferrous metals; and the
         manufacture of nails,
         spikes, structural shapes,
         tubing, wire, and cable.
 ______________________________________________________________________
 33.21   Manufacture of Primary
         Nonferrous Metals--Special
         Tools:

         Includes assets defined as     6.5         5           6.5
         special tools such as
         dies, jigs, molds,
         patterns, fixtures,
         gauges, and drawings
         concerning such special
         tools used in the
         activities as defined in
         class 33.2, Manufacture of
         Primary Nonferrous Metals.
         Special tools are
         specifically designed for
         the production or
         processing of particular
         products or parts and have
         no significant utilitarian
         value and cannot be
         adapted to further or
         different use after
         changes or improvements
         are made in the model
         design of the particular
         part produced by the
         special tools. Does not
         include general purpose
         small tools such as
         wrenches and drills, both
         hand and power-driven, and
         other general purpose
         equipment such as
         conveyors, transfer
         equipment, and materials
         handling devices. Rolls,
         mandrels and refractories
         are not included in class
         33.21 but are included in
         class 33.2.
 ______________________________________________________________________
 33.3    Manufacture of Foundry
         Products:

         Includes assets used in         14         7           14
         the casting of iron and
         steel, including related
         operations such as
         molding and coremaking.
         Also includes assets used
         in the finishing of
         castings and patternmaking
         when performed at the
         foundry, all special tools
         and related land
         improvements.
 ______________________________________________________________________
 33.4    Manufacture of Primary
         Steel Mill Products:

         Includes assets used in         15         7           15
         the smelting, reduction,
         and refining of iron and
         steel from ore, pig, or
         scrap; the rolling,
         drawing and alloying of
         steel; the manufacture of
         nails, spikes, structural
         shapes, tubing, wire, and
         cable. Includes assets
         used by steel service
         centers, ferrous metal
         forges, and assets used
         in coke production,
         regardless of ownership.
         Also includes related land
         improvements and all
         special tools used in the
         above activities.
 ______________________________________________________________________
 34.0    Manufacture of Fabricated
         Metal Products:

         Includes assets used in         12         7           12
         the production of metal
         cans, tinware, fabricated
         structural metal products,
         metal stampings, and other
         ferrous and nonferrous
         metal and wire products
         not elsewhere classified.
         Does not include assets
         used to manufacture
         non-electric heating
         apparatus.
 ______________________________________________________________________
 34.01   Manufacture of Fabricated
         Metal Products--Special
         Tools:

         Includes assets defined as       3         3            3
         special tools such as
         dies, jigs, molds,
         patterns, fixtures,
         gauges, and returnable
         containers and drawings
         concerning such special
         tools used in the
         activities as defined in
         class 34.0. Special tools
         are specifically designed
         for the production or
         processing of particular
         machine components,
         products, or parts, and
         have no significant
         utilitarian value and
         cannot be adapted to
         further or different use
         after changes or
         improvements are made in
         the model design of the
         particular part produced
         by the special tools. Does
         not include general small
         tools such as wrenches and
         drills, both hand and
         power-driven, and other
         general purpose equipment
         such as conveyors,
         transfer equipment, and
         materials handling
         devices.
 ______________________________________________________________________
 35.0    Manufacture of Electrical
         and Non-Electrical
         Machinery and Other
         Mechanical Products:

         Includes assets used to         10         7           10
         manufacture or rebuild
         finished machinery and
         equipment and replacement
         parts thereof such as
         machine tools, general
         industrial and special
         industry machinery,
         electrical power
         generation, transmission,
         and distribution systems,
         space heating, cooling,
         and refrigeration systems,
         commercial and home
         appliances, farm and
         garden machinery,
         construction machinery,
         mining and oil field
         machinery, internal
         combustion engines
         (except those elsewhere
         classified), turbines
         (except those that power
         airborne vehicles),
         batteries, lamps and
         lighting fixtures, carbon
         and graphite products, and
         electromechanical and
         mechanical products
         including business
         machines, instruments,
         watches and clocks,
         vending and amusement
         machines, photographic
         equipment, medical and
         dental equipment and
         appliances, and ophthalmic
         goods. Includes assets
         used by manufacturers or
         rebuilders of such
         finished machinery and
         equipment in activities
         elsewhere classified such
         as the manufacture of
         castings, forgings, rubber
         and plastic products,
         electronic subassemblies
         or other manufacturing
         activities if the interim
         products are used by the
         same manufacturer
         primarily in the
         manufacture, assembly, or
         rebuilding of such
         finished machinery and
         equipment. Does not
         include assets used in
         mining, assets used in the
         manufacture of primary
         ferrous and nonferrous
         metals, assets included in
         class 00.11 through 00.4
         and assets elsewhere
         classified.
 ______________________________________________________________________
 36.0    Manufacture of Electronic
         Components, Products, and
         Systems:

         Includes assets used in          6         5            6
         the manufacture of
         electronic communication,
         computation,
         instrumentation and
         control system, including
         airborne applications;
         also includes assets used
         in the manufacture of
         electronic products such
         as frequency and amplitude
         modulated transmitters and
         receivers, electronic
         switching stations,
         television cameras, video
         recorders, record players
         and tape recorders,
         computers and computer
         peripheral machines, and
         electronic instruments,
         watches, and clocks; also
         includes assets used in
         the manufacture of
         components, provided their
         primary use is products and
         systems defined above such
         as electron tubes,
         capacitors, coils,
         resistors, printed circuit
         substrates, switches,
         harness cables, lasers,
         fiber optic devices, and
         magnetic media devices.
         Specifically excludes
         assets used to manufacture
         electronic products and
         components, photocopiers,
         typewriters, postage
         meters and other
         electromechanical and
         mechanical business
         machines and instruments
         that are elsewhere
         classified. Does not
         include semiconductor
         manufacturing equipment
         included in class 36.1.
 ______________________________________________________________________
 36.1    Any Semiconductor
         Manufacturing Equipment          5         5            5
 ______________________________________________________________________
 37.11   Manufacture of Motor
         Vehicles:

         Includes assets used in         12         7           12
         the manufacture and
         assembly of finished
         automobiles, trucks,
         trailers, motor homes, and
         buses. Does not include
         assets used in mining,
         printing and publishing,
         production of primary
         metals, electricity, or
         steam, or the manufacture
         of glass, industrial
         chemicals, batteries, or
         rubber products, which are
         classified elsewhere.
         Includes assets used in
         manufacturing activities
         elsewhere classified other
         than those excluded above,
         where such activities are
         incidental to and an
         integral part of the
         manufacture and assembly
         of finished motor vehicles
         such as the manufacture of
         parts and subassemblies of
         fabricated metal products,
         electrical equipment,
         textiles, plastics,
         leather, and foundry and
         forging operations. Does
         not include any assets not
         classified in
         manufacturing activity
         classes, e.g., does not
         include any assets
         classified in asset
         guideline classes 00.11
         through 00.4. Activities
         will be considered
         incidental to the
         manufacture and assembly
         of finished motor vehicles
         only if 75 percent or more
         of the value of the
         products produced under
         one roof are used for the
         manufacture and assembly
         of finished motor
         vehicles. Parts that are
         produced as a normal
         replacement stock
         complement in connection
         with the manufacture and
         assembly of finished motor
         vehicles are considered
         used for the manufacture
         assembly of finished motor
         vehicles. Does not include
         assets used in the
         manufacture of component
         parts if these assets are
         used by taxpayers not
         engaged in the assembly of
         finished motor vehicles.
 ______________________________________________________________________
 37.12   Manufacture of Motor
         Vehicles--Special Tools:

         Includes assets defined as       3         3           3
         special tools, such as
         jigs, dies, fixtures,
         molds, patterns, gauges,
         and specialty transfer and
         shipping devices, owned by
         manufacturers of finished
         motor vehicles and used in
         qualified activities as
         defined in class 37.11.
         Special tools are
         specifically designed for
         the production or
         processing of particular
         motor vehicle components
         and have no significant
         utilitarian value, and
         cannot be adapted to
         further or different use,
         after changes or
         improvements are made in
         the model design of the
         particular part produced
         by the special tools. Does
         not include general
         purpose small tools such
         as wrenches and drills,
         both hand and powerdriven,
         and other general purpose
         equipment such as
         conveyors, transfer
         equipment, and materials
         handling devices.
 ______________________________________________________________________
 37.2    Manufacture of Aerospace
         Products:

         Includes assets used in         10         7           10
         the manufacture and
         assembly of airborne
         vehicles and their
         component parts including
         hydraulic, pneumatic,
         electrical, and mechanical
         systems. Does not include
         assets used in the
         production of electronic
         airborne detection,
         guidance, control,
         radiation, computation,
         test, navigation, and
         communication equipment
         or the components thereof.
 ______________________________________________________________________
 37.31   Ship and Boat Building
         Machinery and Equipment:

         Includes assets used in         12         7           12
         the manufacture and repair
         of ships, boats, caissons,
         marine drilling rigs, and
         special fabrications not
         included in asset classes
         37.32 and 37.33.
         Specifically includes all
         manufacturing and
         repairing machinery and
         equipment, including
         machinery and equipment
         used in the operation of
         assets included in asset
         class 37.32. Excludes
         buildings and their
         structural components.
 ______________________________________________________________________
 37.32   Ship and Boat Building
         Dry Docks and Land
         Improvements:

         Includes assets used in         16        10           16
         the manufacture and repair
         of ships, boats, caissons,
         marine drilling rigs, and
         special fabrications not
         included in asset classes
         37.31 and 37.33.
         Specifically includes
         floating and fixed dry
         docks, ship basins,
         graving docks, shipways,
         piers, and all other land
         improvements such as
         water, sewer, and electric
         systems. Excludes
         buildings and their
         structural components.
 ______________________________________________________________________
 37.33   Ship and Boat
         Building--Special Tools:

         Includes assets defined as     6.5         5           6.5
         special tools such as
         dies, jigs, molds,
         patterns, fixtures,
         gauges, and drawings
         concerning such special
         tools used in the
         activities defined in
         classes 37.31 and 37.32.
         Special tools are
         specifically designed for
         the production or
         processing of particular
         machine components,
         products, or parts, and
         have no significant
         utilitarian value and
         cannot be adapted to
         further or different use
         after changes or
         improvements are made in
         the model design of the
         particular part produced
         by the special tools. Does
         not include general
         purpose small tools such
         as wrenches and drills,
         both hand and
         power-driven, and other
         general purpose equipment
         such as conveyors,
         transfer equipment, and
         materials handling
         devices.
 ______________________________________________________________________
 37.41   Manufacture of
         Locomotives:

         Includes assets used in       11.5         7           11.5
         building or rebuilding
         railroad locomotives
         (including mining and
         industrial locomotives).
         Does not include assets of
         railroad transportation
         companies or assets of
         companies which
         manufacture components
         of locomotives but do not
         manufacture finished
         locomotives.
 ______________________________________________________________________
 37.42   Manufacture of Railroad
         Cars:

         Includes assets used in         12         7           12
         building or rebuilding
         railroad freight or
         passenger cars (including
         rail transit cars). Does
         not include assets of
         railroad transportation
         companies or assets of
         companies which
         manufacture components of
         railroad cars but do not
         manufacture finished
         railroad cars.
 ______________________________________________________________________
 39.0    Manufacture of Athletic,
         Jewelry, and Other Goods:

         Includes assets used in         12         7           12
         the production of jewelry;
         musical instruments; toys
         and sporting goods; motion
         picture and television
         films and tapes; and pens,
         pencils, office and art
         supplies, brooms, brushes,
         caskets, etc.

         Railroad Transportation:

         Classes with the prefix 40
         include the assets
         identified below that are
         used in the commercial and
         contract carrying of
         passengers and freight by
         rail. Assets of
         electrified railroads will
         be classified in a manner
         corresponding to that set
         forth below for railroads
         not independently operated
         as electric lines.
         Excludes the assets
         included in classes with
         the prefix beginning 00.1
         and 00.2 above, and also
         excludes any
         non-depreciable assets
         included in Interstate
         Commerce Commission
         accounts enumerated for
         this class.
 ______________________________________________________________________
 40.1    Railroad Machinery and
         Equipment:

         Includes assets classified      14         7           14
         in the following
         Interstate Commerce
         Commission accounts:

         Roadway accounts:

           (16) Station and office
                buildings (freight
                handling machinery
                and equipment only)

           (25) TOFC/COFC terminals
                (freight handling
                machinery and
                equipment only)

           (26) Communication
                systems

           (27) Signals and
                interlockers

           (37) Roadway machines

           (44) Shop machinery

         Equipment accounts:

           (52) Locomotives

           (53) Freight train cars

           (54) Passenger train
                cars

           (57) Work equipment
 ______________________________________________________________________
 40.2    Railroad Structures and
         Similar Improvements:

         Includes assets classified      30        20           30
         in the following
         Interstate Commerce
         Commission road accounts:

            (6) Bridges, trestles,
                and culverts

            (7) Elevated structures

           (13) Fences, snowsheds,
                and signs

           (16) Station and office
                buildings (stations
                and other operating
                structures only)

           (17) Roadway buildings

           (18) Water stations

           (19) Fuel stations

           (20) Shops and
                enginehouses

           (25) TOFC/COFC terminals
                (operating
                structures only)

           (31) Power transmission
                systems

           (35) Miscellaneous
                structures

           (39) Public improvements
                construction
 ______________________________________________________________________
 40.3    Railroad Wharves and
         Docks:

         Includes assets classified      20        15           20
         in the following
         Interstate Commission
         Commerce accounts:

           (23) Wharves and docks

           (24) Coal and ore
                wharves
 ______________________________________________________________________
 40.4    Railroad Track                  10         7           10
 ______________________________________________________________________
 40.51   Railroad Hydraulic              50        20           50
         Electric Generating
         Equipment
 ______________________________________________________________________
 40.52   Railroad Nuclear                20        15           20
         Electric Generating
         Equipment
 ______________________________________________________________________
 40.53   Railroad Steam                  28        20           28
         Electric Generating
         Equipment
 ______________________________________________________________________
 40.54   Railroad Steam,                 28        20           28
         Compressed Air, and
         Other Power Plan Equipment
 ______________________________________________________________________
 41.0    Motor
         Transport--Passengers:

         Includes assets used in          8         5            8
         the urban and interurban
         commercial and contract
         carrying of passengers by
         road, except the
         transportation assets
         included in classes with
         the prefix 00.2.
 ______________________________________________________________________
 42.0    Motor Transport--Freight:

         Includes assets used in          8         5            8
         the commercial and
         contract carrying of
         freight by road, except
         the transportation assets
         included in classes with
         the prefix 00.2.
 ______________________________________________________________________
 44.0    Water Transportation:

         Includes assets used in         20        15           20
         the commercial and
         contract carrying of
         freight and passengers by
         water except the
         transportation assets
         included in classes with
         the prefix 00.2. Includes
         all related land
         improvements.
 ______________________________________________________________________
 45.0    Air Transport:

         Includes assets (except         12         7           12
         helicopters) used in
         commercial and contract
         carrying of passengers
         and freight by air. For
         purposes of section
         1.167(a)-11(d)(2)(iv)(a)
         of the regulations,
         expenditures for "repair,
         maintenance,
         rehabilitation, or
         improvement," shall
         consist of direct
         maintenance expenses
         (irrespective of
         airworthiness provisions
         or charges) as defined by
         Civil Aeronautics Board
         uniform accounts 5200,
         maintenance burden
         (exclusive of expenses
         pertaining to maintenance
         buildings and
         improvements) as defined
         by Civil Aeronautics Board
         accounts 5300, and
         expenditures which are not
         "excluded additions" as
         defined in section
         1.167(a)-11(d)(2)(vi) of
         the regulations and which
         would be charged to
         property and equipment
         accounts in the Civil
         Aeronautics Board uniform
         system of accounts.
 ______________________________________________________________________
 45.1    Air Transport
         (restricted):

         Includes each asset              6         5            6
         described in the
         description of class 45.0
         which was held by the
         taxpayer on April 15,
         1976, or is acquired by
         the taxpayer pursuant to a
         contract which was, on
         April 15, 1976, and at all
         times thereafter, binding
         on the taxpayer. This
         criterion of
         classification based on
         binding contract concept
         is to be applied in the
         same manner as under the
         general rules expressed in
         section 49(b)(1), (4), (5)
         and (8) of the Code (as in
         effect prior to its repeal
         by the Revenue Act of
         1978, section 312(c)(1),
         (d), 1978-3 C.B. 1, 60).
 ______________________________________________________________________
 46.0    Pipeline Transportation:

         Includes assets used in         22        15           22
         the private, commercial,
         and contract carrying of
         petroleum, gas and other
         products by means of pipes
         and conveyors. The trunk
         lines and related storage
         facilities of integrated
         petroleum and natural gas
         producers are included in
         this class. Excludes
         initial clearing and
         grading land improvements
         as specified in Rev. Rul.
         72-403, 1972-2; C.B. 102,
         but includes all other
         related land improvements.
 ______________________________________________________________________
         Telephone Communications:

         Includes the assets
         classified below and that
         are used in the provision
         of commercial and contract
         telephonic services such
         as:

 48.11   Telephone Central Office
         Buildings:

         Includes assets intended        45        20           45
         to house central office
         equipment, as defined in
         Federal Communications
         Commission Part 31 Account
         No. 212 whether section
         1245 or section 1250
         property.
 ______________________________________________________________________
 48.12   Telephone Central Office
         Equipment:

         Includes central office         18        10           18
         switching and related
         equipment as defined in
         Federal Communications
         Commission Part 31 Account
         No. 221.

         Does not include
         computer-based telephone
         central office switching
         equipment included in
         class 48.121. Does not
         include private branch
         exchange (PBX) equipment.
 ______________________________________________________________________
 48.121  Computer-based Telephone
         Central Office Switching
         Equipment:

         Includes equipment whose       9.5         5          9.5
         functions are those of a
         computer or peripheral
         equipment (as defined in
         section 168(i)(2)(B) of
         the Code) used in its
         capacity as telephone
         central office equipment.
         Does not include private
         exchange (PBX) equipment.
 ______________________________________________________________________
 48.13   Telephone Station
         Equipment:

         Includes such station           10         7^*          10^*
         apparatus and connections
         as teletypewriters,
         telephones, booths,
         private exchanges, and
         comparable equipment as
         defined in Federal
         Communications Commission
         Part 31 Account Nos. 231,
         232, and 234.
 ______________________________________________________________________
 48.14   Telephone Distribution
         Plant:

         Includes such assets as         24        15           24
         pole lines, cable, aerial
         wire, underground
         conduits, and comparable
         equipment, and related
         land improvements as
         defined in Federal
         Communications Commission
         Part 31 Account Nos. 241,
         242.1, 242.2, 242.3,
         242.4, 243, and 244.
 ______________________________________________________________________
 48.2    Radio and Television
         Broadcastings:

         Includes assets used in          6         5            6
         radio and television
         broadcasting, except
         transmitting towers.

         Telegraph, Ocean Cable,
         and Satellite
         Communications (TOCSC)
         includes
         communications-related
         assets used to provide
         domestic and international
         radio-telegraph,
         wire-telegraph,
         ocean-cable, and satellite
         communications services;
         also includes related land
         improvements. If property
         described in Classes
         48.31-48.45 is comparable
         to telephone distribution
         plant described in Class
         48.14 and used for 2-way
         exchange of voice and data
         communication which is the
         equivalent of telephone
         communication, such
         property is assigned a
         class life of 24 years
         under this revenue
         procedure. Comparable
         equipment does not include
         cable television equipment
         used primarily for 1-way
         communication.
 ______________________________________________________________________
 48.31   TOCSC--Electric Power
         Generating and
         Distribution Systems:

         Includes assets used in         19        10           19
         the provision of electric
         power by generation,
         modulation, rectification,
         channelization, control,
         and distribution. Does not
         include these assets when
         they are installed on
         customers premises.
 ______________________________________________________________________
 48.32   TOCSC--High Frequency Radio
         and Microwave Systems:

         Includes assets such as         13         7           13
         transmitters and
         receivers, antenna
         supporting structures,
         antennas, transmission
         lines from equipment to
         antenna, transmitter
         cooling systems, and
         control and amplification
         equipment. Does not
         include cable and
         long-line systems.
 ______________________________________________________________________
 48.33   TOCSC--Cable and Long-line
         Systems:

         Includes assets such as        26.5       20          26.5
         transmission lines, pole
         lines, ocean cables,
         buried cable and conduit,
         repeaters, repeater
         stations, and other
         related assets. Does not
         include high frequency
         radio or microwave
         systems.
 ______________________________________________________________________
 48.34   TOCSC--Central Office
         Control Equipment:

         Includes assets for            16.5       10          16.5
         general control,
         switching, and monitoring
         of communications signals
         including
         electromechanical
         switching and channeling
         apparatus, multiplexing
         equipment patching and
         monitoring facilities,
         in-house cabling,
         teleprinter equipment,
         and associated site
         improvements.
 ______________________________________________________________________
 48.35   TOCSC--Computerized
         Switching, Channeling,
         and Associated Control
         Equipment:

         Includes central office        10.5        7          10.5
         switching computers,
         interfacing computers,
         other associated
         specialized control
         equipment, and site
         improvements.
 ______________________________________________________________________
 48.36   TOCSC--Satellite Ground
         Segment Property:

         Includes assets such as         10         7           10
         fixed earth station
         equipment, antennas,
         satellite communications
         equipment, and interface
         equipment used in
         satellite communications.
         Does not include general
         purpose equipment or
         equipment used in
         satellite space segment
         property.
 ______________________________________________________________________
 48.37   TOCSC--Satellite Space
         Segment Property:

         Includes satellites and          8         5           8
         equipment used for
         telemetry, tracking,
         control, and monitoring
         when used in satellite
         communications.
 ______________________________________________________________________
 48.38   TOCSC--Equipment Installed
         on Customer's Premises:

         Includes assets installed       10         7           10
         on customer's premises,
         such as computers,
         terminal equipment, power
         generation and
         distribution systems,
         private switching center,
         teleprinters, facsimile
         equipment and other
         associated and related
         equipment.
 ______________________________________________________________________
 48.39   TOCSC--Support and Service
         Equipment:

         Includes assets used to        13.5        7          13.5
         support but not engage in
         communications. Includes
         store, warehouse and shop
         tools, and test and
         laboratory assets.

         Cable Television (CATV):
         Includes
         communications-related
         assets used to provide
         cable television community
         antenna television
         services. Does not include
         assets used to provide
         subscribers with two-way
         communications services.
 ______________________________________________________________________
 48.41   CATV--Headend:

         Includes assets such as         11         7           11
         towers, antennas,
         preamplifiers, converters,
         modulation equipment, and
         program non-duplication
         systems. Does not include
         headend buildings and
         program origination
         assets.
 ______________________________________________________________________
 48.42   CATV--Subscriber
         Connection and
         Distribution Systems:

         Includes assets such as         10         7           10
         trunk and feeder cable,
         connecting hardware,
         amplifiers, power
         equipment, passive
         devices, directional taps,
         pedestals, pressure taps,
         drop cables, matching
         transformers, multiple set
         connector equipment, and
         convertors.
 ______________________________________________________________________
 48.43   CATV--Program Origination:

         Includes assets such as          9         5            9
         cameras, film chains,
         video tape recorders,
         lighting, and remote
         location equipment
         excluding vehicles. Does
         not include buildings and
         their structural
         components.
 ______________________________________________________________________
 48.44   CATV--Service and Test:

         Includes assets such as        8.5         5          8.5
         oscilloscopes, field
         strength meters, spectrum
         analyzers, and cable
         testing equipment, but
         does not include vehicles.
 ______________________________________________________________________
 48.45   CATV--Microwave Systems:

         Inlcudes assets such as        9.5         5          9.5
         towers, antennas,
         transmitting and receiving
         equipment, and broad band
         microwave assets is used
         in the provision of cable
         television services. Does
         not include assets used in
         the provision of common
         carrier services.
 ______________________________________________________________________
         Electric, Gas, Water and
         Steam, Utility Services:

         Includes assets used in         50        20           50
         the production,
         transmission and
         distribution of
         electricity, gas, steam,
         or water for sale
         including related land
         improvements.

 49.11   Electric Utility Hydraulic
         Production Plant:

         Includes assets used in
         the hydraulic power
         production of electricity
         for sale, including
         related land improvements,
         such as dams, flumes,
         canals, and waterways.
 ______________________________________________________________________
 49.12   Electric Utility Nuclear
         Production Plant:

         Includes assets used in         20        15           20
         the nuclear power
         production and electricity
         for sale and related land
         improvements. Does not
         include nuclear fuel
         assemblies.
 ______________________________________________________________________
 49.121  Electric Utility Nuclear
         Fuel Assemblies:

         Includes initial core and        5         5            5
         replacement core nuclear
         fuel assemblies (i.e., the
         composite of fabricated
         nuclear fuel and
         container) when used in a
         boiling water, pressurized
         water, or high temperature
         gas reactor used in the
         production of electricity.
         Does not include nuclear
         fuel assemblies used in
         breader reactors.
 ______________________________________________________________________
 49.13   Electric Utility Steam
         Production Plant:

         Includes assets used in         28        20           28
         the steam power production
         of electricity for sale,
         combusion turbines
         operated in a combined
         cycle with a conventional
         steam unit and related
         land improvements. Also
         includes package boilers,
         electric generators and
         related assets such as
         electricity and steam
         distribution systems as
         used by a waste reduction
         and resource recovery
         plant if the steam or
         electricity is normally
         for sale to others.
 ______________________________________________________________________
 49.14   Electric Utility
         Transmission and
         Distribution Plant:

         Includes assets used in         30        20           30
         the transmission and
         distribution of
         electricity for sale and
         related land improvements.
         Excludes initial clearing
         and grading land
         improvements as specified
         in Rev. Rul. 72-403,
         1972-2 C.B. 102.
 ______________________________________________________________________
 49.15   Electric Utility
         Combustion Turbine
         Production Plant:

         Includes assets used in         20        15           20
         the production of
         electricity for sale by
         the use of such prime
         movers as jet engines,
         combustion turbines,
         diesel engines, gasoline
         engines, and other
         internal combustion
         engines, their associated
         power turbines and/or
         generators, and related
         land improvements. Does
         not include combustion
         turbines operated in a
         combined cycle with a
         conventional steam unit.
 ______________________________________________________________________
 49.21   Gas Utility Distribution
         Facilities:

         Includes gas water heaters      35        20           35
         and gas conversion
         equipment installed by
         utility on customers'
         premises on a rental
         basis.
 ______________________________________________________________________
 49.221  Gas Utility Manufactured
         Gas Production Plants:

         Includes assets used in         30        20           30
         the manufacture of gas
         having chemical and/or
         physical properties which
         do not permit complete
         interchangeability with
         domestic natural gas. Does
         not include gas-producing
         systems and related
         systems used in waste
         reduction and resource
         recovery plants which are
         elsewhere classified.
 ______________________________________________________________________
 49.222  Gas Utility Substitute
         Natural Gas (SNG)
         Production Plant (naphtha
         or lighter hydrocarbon
         feedstocks):

         Includes assets used in         14         7           14
         the catalytic conversion
         of feedstocks or naphtha
         or lighter hydrocarbons to
         a gaseous fuel which is
         completely interchangeable
         with domestic natural gas.
 ______________________________________________________________________
 49.223  Substitute Natural
         Gas--Coal Gasification:

         Includes assets used in         18        10           18
         the manufacture and
         production of pipeline
         quality gas from coal
         using the basic Lurgi
         process with advanced
         methanation. Includes all
         process plant equipment
         and structures used in
         this coal gasification
         process and all utility
         assets such as cooling
         systems, water supply and
         treatment facilities, and
         assets used in the
         production and
         distribution of
         electricity and steam for
         use by the taxpayer in a
         gasification plant and
         attendant coal mining site
         processes but not for
         assets used in the
         production and
         distribution of
         electricity and steam for
         sale to others. Also
         includes all other related
         land improvements. Does
         not include assets used
         in the direct mining and
         treatment of coal prior to
         the gasification process
         itself.
 ______________________________________________________________________
 49.23   Natural Gas Production          14         7           14
         Plant
 ______________________________________________________________________
 49.24   Gas Utility Trunk
         Pipelines and Related
         Storage Facilities:

         Excluding initial clearing      22        15           22
         and grading land
         improvements as specified
         in Rev. Rul. 72-40.
 ______________________________________________________________________
 49.25   Liquefied Natural Gas
         Plant:

         Includes assets used in         22        15           22
         the liquefaction, storage,
         and regasification of
         natural gas including
         loading and unloading
         connections,
         instrumentation equipment
         and controls, pumps,
         vaporizers and odorizers,
         tanks, and related land
         improvements. Also
         includes pipeline
         interconnections with gas
         transmission lines and
         distribution systems and
         marine terminal
         facilities.
 ______________________________________________________________________
 49.3    Water Utilities:

         Includes assets used in         50       20^***         50
         the gathering, treatment,
         and commercial
         distribution of water.
 ______________________________________________________________________
 49.4    Central Steam Utility
         Production and
         Distribution:

         Includes assets used in         28        20           28
         the production and
         distribution of steam for
         sale. Does not include
         assets used in waste
         reduction and resource
         recovery plants which are
         elsewhere classified.
 ______________________________________________________________________
 49.5    Waste Reduction and
         Resource Recovery Plants:

         Includes assets used in         10         7           10
         the conversion of refuse
         or other solid waste or
         biomass to heat or to a
         solid, liquid, or gaseous
         fuel. Also includes all
         process plant equipment
         and structures at the site
         used to receive, handle,
         collect, and process
         refuse or other solid
         waste or biomass in a
         waterwall, combustion
         system, oil or gas
         pyrolysis system, or
         refuse derived fuel
         system to create hot
         water, gas, steam and
         electricity. Includes
         material recovery and
         support assets used in
         refuse or solid refuse or
         solid waste receiving,
         collecting, handling,
         sorting, shredding,
         classifying, and
         separation systems. Does
         not include any package
         boilers, or electric
         generators and related
         assets such as
         electricity, hot water,
         steam and manufactured
         gas production plants
         classified in classes
         00.4, 49.13, 49.221, and
         49.4. Does include,
         however, all other
         utilities such as water
         supply and treatment
         facilities, ash handling
         and other related land
         improvements of a waste
         reduction and resource
         recovery plant.
 ______________________________________________________________________
 50.     Municipal Wastewater            24        15           24
         Treatment Plant
 ______________________________________________________________________
 51.     Municipal Sewer                 50       20^***         50
 ______________________________________________________________________
 57.0    Distributive Trades and
         Services:

         Includes assets used             9         5           9^*
         in wholesale and retail
         trade, and personal and
         professional services.
         Includes section 1245
         assets used in marketing
         petroleum and petroleum
         products.
 ______________________________________________________________________
 57.1    Distributive Trades and
         Services--Billboard,
         Service Station Buildings
         and Petroleum Marketing
         Land Improvements:

         Includes section 1250           20        15           20
         assets, including service
         station buildings and
         depreciable land
         improvements, whether
         section 1245 property or
         section 1250 property,
         used in the marketing
         of petroleum and
         petroleum products, but
         not including any of
         these facilities related
         to petroleum and natural
         gas trunk pipelines.
         Includes car wash
         buildings and related
         land improvements.
         Includes billboards,
         whether such assets are
         section 1245 property or
         section 1250 property.
         Excludes all other land
         improvements, buildings
         and structural components
         as defined in section
         1.48-1(e) of the
         regulations. See Gas
         station convenience
         stores in chapter 3.
 ______________________________________________________________________
 79.0    Recreation:

         Includes assets used in         10         7           10
         the provision of
         entertainment services on
         payment of a fee or
         admission charge, as in
         the operation of bowling
         alleys, billiard and pool
         establishments, theaters,
         concert halls, and
         miniature golf courses.
         Does not include
         amusement and theme parks
         and assets which consist
         primarily of specialized
         land improvements or
         structures, such as golf
         courses, sports stadia,
         race tracks, ski slopes,
         and buildings which house
         the assets used in
         entertainment services.
 ______________________________________________________________________
 80.0    Theme and Amusement Parks:

         Includes assets used in       12.5         7         12.5
         the provision of rides,
         attractions, and
         amusements in activities
         defined as theme and
         amusement parks, and
         includes appurtenances
         associated with a ride,
         attraction, amusement or
         theme setting within the
         park such as ticket
         booths, facades, shop
         interiors, and props,
         special purpose
         structures, and buildings
         other than warehouses,
         administration buildings,
         hotels, and motels.
         Includes all land
         improvements for or in
         support of park activities
         (e.g., parking lots,
         sidewalks, waterways,
         bridges, fences,
         landscaping, etc.), and
         support functions (e.g.,
         food and beverage
         retailing, souvenir
         vending and other
         nonlodging accommodations)
         if owned by the park and
         provided exclusively for
         the benefit of park
         patrons. Theme and
         amusement parks are
         defined as combinations of
         amusements, rides, and
         attractions which are
         permanently situated on
         park land and open to the
         public for the price of
         admission. This guideline
         class is a composite of
         all assets used in this
         industry except
         transportation equipment
         (general purpose trucks,
         cars, airplanes, etc.,
         which are included in
         asset guideline classes
         with the prefix 00.2),
         assets used in the
         provision of
         administrative services
         (asset classes with the
         prefix 00.1) and
         warehouses, administration
         buildings, hotels and
         motels.
 ______________________________________________________________________
         Certain Property for
         Which Recovery Periods
         Assigned

         A. Personal Property With                  7           12
         No Class Life

         Section 1245 Real                          7           40
         Property With No Class
         Life

         B. Qualified                    ^**         5            5
         Technological Equipment,
         as defined in section
         168(i)(2).

         C. Property Used in             ^**         5     class life if
         Connection with Research                            no class
         and Experimentation                                 life--12
         referred to in section
         168(e)(3)(B).

         D. Alternative energy           ^**         5     class life if
         property described in                               no class
         sections 48(l)(3)(A)(ix)                            life--12
         (as in effect on the day
         before the date of
         enactment (11/5/90) of the
         Revenue Reconciliation Act
         of 1990).

         E. Biomass property             ^**         5     class life if
         described in section                                no class
         48(l)(15) (as in effect                             life--12
         on the day before the date
         of enactment (11/5/90) of
         the Revenue Reconciliation
         Act of 1990) and is a
         qualifying small
         production facility
         within the meaning of
         section 3(17)(c) of the
         Federal Power Act (16
         U.S.C. 796(17)(C)), as in
         effect on September 1,
         1986.

         F. Energy property              ^**         5     class life if
         described in section                                no class
         48(a)(3)(A) (or would be                            life--12
         described if "solar or
         wind energy" were
         substituted for "solar
         energy" in section
         48(a)(3)(A)(i)).
 ______________________________________________________________________

FOOTNOTES TO TABLE

^* Property described in asset classes 01.223, 01.224,
 and 01.225 are assigned recovery periods but have no class lives.

^** A horse is more than 2 (or 12) years old after the
 day that is 24 (or 144) months after its actual birthdate.

^*** 7 if property was placed in service before 1989.

^* Property described in asset guideline class 48.13
 which is qualified technological equipment as defined in section
 168(i)(2) is assigned a 5-year recovery period.

^* Any high technology medical equipment as defined in
 section 168(i)(2)(C) which is described in asset guideline class 57.0
 is assigned a 5-year recovery period for the alternate MACRS method.

^** The class life (if any) of property described in
 classes B, C, D, E, or F is determined by reference to the asset
 guideline classes. If an item of property described in paragraphs B,
 C, D, E, or F is not described in any asset guideline class, such
 item of property has no class life.

^*** Use straight line over 25 years if placed in service
 after June 12, 1996, unless placed in service under a binding contract
 in effect before June 10, 1996, and at all times until placed in
 service.

END OF FOOTNOTES TO TABLE

The definitions in this glossary are the meanings of the terms as used in this publication. The same term used in another publication may have a slightly different meaning.

Abstract fees: Expenses generally paid by a buyer to research the title of real property.

Active conduct of a trade or business: Generally, for the section 179 deduction, a taxpayer is considered to conduct a trade or business actively if he or she meaningfully participates in the management or operations of the trade or business. A mere passive investor in a trade or business does not actively conduct the trade or business.

Adjusted basis: The original cost of property, plus certain additions and improvements, minus certain deductions such as depreciation allowed or allowable and casualty losses.

Amortization: A ratable deduction for the cost of intangible property over its useful life.

Amount realized: The total of all money received plus the fair market value of all property or services received from a sale or exchange. The amount realized also includes any liabilities assumed by the buyer and any liabilities to which the property transferred is subject, such as real estate taxes or a mortgage.

Basis: A measure of an individual's investment in property for tax purposes.

Business/investment use: Usually, a percentage showing how much an item of property, such as an automobile, is used for business and investment purposes.

Capitalized: Expended or treated as an item of a capital nature. A capitalized amount is not deductible as a current expense and must be included in the basis of property.

Circumstantial evidence: Details or facts which indirectly point to other facts.

Class life: A number of years that establishes the property class and recovery period for most types of property under the General Depreciation System (GDS) and Alternative Depreciation System (ADS).

Commuting: Travel between a personal home and work or job site within the area of an individual's tax home.

Convention: A method established under the Modified Accelerated Cost Recovery System (MACRS) to determine the portion of the year to depreciate property both in the year the property is placed in service and in the year of disposition.

Declining balance method: An accelerated method to depreciate property. The General Depreciation System (GDS) of MACRS uses the 150% and 200% declining balance methods for certain types of property. A depreciation rate (percentage) is determined by dividing the declining balance percentage by the recovery period for the property.

Disposition: The permanent withdrawal from use in a trade or business or from the production of income.

Documentary evidence: Written records that establish certain facts.

Exchange: To barter, swap, part with, give, or transfer property for other property or services.

Fair market value (FMV): The price that property brings when it is offered for sale by one who is willing but not obligated to sell, and is bought by one who is willing or desires to buy but is not compelled to do so.

Fiduciary: The one who acts on behalf of another as a guardian, trustee, executor, administrator, receiver, or conservator.

Fungible commodity: A commodity of a nature that one part may be used in place of another part.

Goodwill: An intangible property such as the advantage or benefit received in property beyond its mere value. It is not confined to a name but can also be attached to a particular area where business is transacted, to a list of customers, or to other elements of value in business as a going concern.

Grantor: The one who transfers property to another.

Improvement: An addition to or partial replacement of property that adds to its value, appreciably lengthens the time you can use it, or adapts it to a different use.

Intangible property: Property that has value but cannot be seen or touched, such as goodwill, patents, copyrights, and computer software.

Listed property: Passenger automobiles; any other property used for transportation; property of a type generally used for entertainment, recreation or amusement; computers and their peripheral equipment (unless used only at a regular business establishment and owned or leased by the person operating the establishment); and cellular telephones or similar telecommunications equipment.

Nonresidential real property: Most real property other than residential rental property.

Placed in service: Ready and available for a specific use whether in a trade or business, the production of income, a tax-exempt activity, or a personal activity.

Property class: A category for property under MACRS. It generally determines the depreciation method, recovery period, and convention.

Recapture: To include as income on your return an amount allowed or allowable as a deduction in a prior year.

Recovery period: The number of years over which the basis of an item of property is recovered.

Remainder interest: That part of an estate that is left after all the other provisions of a will have been satisfied.

Residential rental property: Real property, generally buildings or structures, if 80% or more of its annual gross rental income is from dwelling units.

Salvage value: An estimated value of property at the end of its useful life. Not used under MACRS.

Section 1245 property: Property that is or has been subject to an allowance for depreciation or amortization. Section 1245 property includes personal property, single purpose agricultural and horticultural structures, storage facilities used in connection with the distribution of petroleum or primary products of petroleum, and railroad grading or tunnel bores.

Section 1250 property: Real property (other than section 1245 property) which is or has been subject to an allowance for depreciation.

Standard mileage rate: The established amount for optional use in determining a tax deduction for automobiles instead of deducting depreciation and actual operating expenses.

Straight line method: A way to figure depreciation for property that ratably deducts the same amount for each year in the recovery period. The rate (in percentage terms) is determined by dividing 1 by the number of years in the recovery period.

Structural components: Parts that together form an entire structure, such as a building. The term includes those parts of a building such as walls, partitions, floors, and ceilings, as well as any permanent coverings such as paneling or tiling, windows and doors, and all components of a central air conditioning or heating system including motors, compressors, pipes and ducts. It also includes plumbing fixtures such as sinks, bathtubs, electrical wiring and lighting fixtures, and other parts that form the structure.

Tangible property: Property you can see or touch, such as buildings, machinery, vehicles, furniture, and equipment.

Tax-exempt: Not subject to tax.

Term interest: A life interest in property, an interest in property for a term of years, or an income interest in a trust. It generally refers to a present or future interest in income from property or the right to use property that terminates or fails upon the lapse of time, the occurrence of an event, or the failure of an event to occur.

Unadjusted basis: The basis of an item of property for purposes of figuring gain on a sale without taking into account any depreciation taken in earlier years but with adjustments for other amounts, including amortization, the section 179 deduction, any special depreciation allowance, any deduction claimed for clean-fuel vehicles or clean-fuel vehicle refueling property placed in service before January 1, 2006, and any electric vehicle credit.

Unit-of-production method: A way to figure depreciation for certain property. It is determined by estimating the number of units that can be produced before the property is worn out. For example, if it is estimated that a machine will produce 1000 units before its useful life ends, and it actually produces 100 units in a year, the percentage to figure depreciation for that year is 10% of the machine's cost less its salvage value.

Useful life: An estimate of how long an item of property can be expected to be usable in trade or business or to produce income.