Depreciation Quickfinder® Handbook

Transcription

Quickfinder ®
(2014 Tax Year)
Updates for the Tax Increase Prevention Act of 2014
Instructions: This packet contains “marked up” changes to the pages in the Depreciation
Quickfinder® Handbook that were affected by the Tax Increase Prevention Act of 2014,
which was enacted after the handbook was published. To update your handbook, you
can make the same changes in your handbook or print the revised page and paste over
the original page.
TAX PREPARATION
Depreciation
Quickfinder
Handbook
®
Depreciation, Amortization,
Sales and Exchanges
2014 Tax Year
MACRS Recovery Periods for Assets Placed in Service in 2014
2014 Vehicle Quick Facts
Recovery Period (Years)
Passenger Autos—GVW (unloaded) up to 6,000 lbs.
Depreciation limit—Acquisition year (special depreciation applies)
Depreciation limit—Acquisition year (no special depreciation)
Second-year limit
Third-year limit
All years thereafter
$ 11,160
1
3,160
5,100
3,050
1,875
1
Trucks and Vans—GVW (loaded) up to 6,000 lbs.
$ 11,460
Depreciation limit—Acquisition year (special depreciation applies)1
Depreciation limit—Acquisition year (no special depreciation)
Second-year limit
Third-year limit
3,460
5,500
3,350
1,975
1
Car, Truck or Van (Including SUVs and Minivans)
GVW over 6,000 but not over 14,000 lbs.
Depreciation limit
Maximum Section 179 deduction
N/A
$ 25,0003
Standard Mileage Rates
Business
Depreciation component
Charitable
Medical and moving
56¢
22¢
14¢
23.5¢
Applies to the sum of MACRS depreciation, special (bonus) depreciation (if
available) and Section 179 expense claimed.
2
The special (bonus) depreciation allowance is not available for business
vehicles placed in service after 2013 unless legislation is enacted that extends
the provision.
3
Some exceptions, including pickups with a bed at least six feet long. Overall
limit on Section 179 expensing also applies.
1
2014 Section 179 Limits1
Maximum deduction
$ 500,000
Qualifying property threshold before phase-out
2,000,000
Additional deduction for empowerment zones2
35,000
Maximum deduction for qualified real property
250,000
3
Maximum deduction (per vehicle) for car, truck or van (including
SUVs and minivans) with GVW over 6,000 but not over 14,000 lbs.
1
2
3
25,000
The increased Section 179 deduction and qualifying property threshold that applied
to tax years beginning in 2013 (see the Section 179 Annual Limits table on Page
5-1) are not available in later tax years unless legislation is enacted to extend
them.
See Increased Limits for Targeted Areas on Page 5-2.
See Qualified Real Property on Page 5-8.
Assets Used in All Business Activities
Airplanes (noncommercial) and helicopters
Automobiles
Computers and peripheral equipment
Heavy general purpose trucks (13,000 lbs. or more)
Light general purpose trucks (less than 13,000 lbs.)
Office furniture and equipment
Tractor units (for over-the-road use)
Trailers
Typewriters, calculators, copiers
Assets Used in Agricultural Activities
Agricultural machinery and equipment
Cattle (breeding or dairy)
Farm buildings, other than single purpose
Fences (agricultural)
Horses (breeding or work) 12 years old or less
Horses (breeding or work) over 12 years old
Single-purpose agricultural or horticultural structures
Trees or vines bearing fruits or nuts
Assets Used in Oil and Gas Industry
Assets used in drilling oil and gas wells
Assets used in exploring and producing oil and gas
Specialized Assets
Assets unique to wholesale and retail trade, and personal
and professional services
High technology medical equipment
Section 1245 assets used in marketing petroleum and
petroleum products
Real Property
Billboards
Land improvements (sidewalks, roads, drainage facilities,
bridges, fences, landscaping, radio towers)
Nonresidential real property
ADS
5
5
5
5
5
7
3
5
5
6
5
5
6
5
10
4
6
6
7
5
20
7
7
3
10
10
10
7
25
10
10
10
15
20
5
7
6
14
5
9
5
5
5
9
15
20
15
20
39
40
Qualified leasehold improvement property1
15
39
Qualified restaurant property1
15
39
15
27.5
15
39
40
20
5
9
5
6
Qualified retail improvement property1
Residential rental property
Retail motor fuels outlet
Other
Appliances, carpet and furniture used in a residential
rental property
Assets used in construction activities by general building
contractors, real estate subdividers and developers
1
GDS/AMT
15 (GDS/AMT) / 39 (ADS) for property placed in service at certain times before 2014.
See Leasehold Improvements on Page 7-9.
Replacement Page 1/2015
© 2014 thomson Reuters/Tax & Accounting.
All Rights Reserved. Quickfinder® is a trademark of Thomson Reuters.
ISSN 1945-2775
ISBN 978-0-7646-6991-5
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tax.thomsonreuters.com
The Depreciation Quickfinder® Handbook is published by thomson Reuters.
Reproduction is prohibited without written permission of the publisher. Not
assignable without consent.
The Depreciation Quickfinder® Handbook is to be used as a first-source, quick
reference to basic tax principles applied to property used in a trade or business
or for the production of income. Its focus is to present often-needed reference
information in a concise, easy-to-use format. The summaries, highlights, tax tips
and other information included herein are intended to be of concern for the average taxpayer only. Information included is general in nature and we acknowledge
the existence of many exceptions. The information this publication contains has
been carefully compiled from sources believed to be reliable, but its accuracy
is not guaranteed. The publisher is not engaged in rendering legal, accounting
or other advice and will not be held liable for any actions or suit based on this
handbook. For further information that applies to a specific tax situation, see IRS
publications, rulings, regulations, court cases and Code sections applicable to that
situation. This handbook is not intended to be used as your only reference source.
Assets for which Straight-Line Method Required
Asset
Recovery Period
Real estate—commercial
39 years
Real estate—residential rental
27.5 years
Listed property used 50% or less in trade or business ADS recovery period
Trees or vines bearing fruits or nuts
10 years
Property used predominantly in farming if taxpayer
elects out of uniform capitalization rules for plants
with long preproductive life
ADS recovery period
Qualified leasehold improvement property
15 years1
Qualified restaurant property
15 years1
Qualified retail improvement property
Property used predominantly outside of the U.S.
Property used in a tax-exempt activity or financed by
tax-exempt bonds
Property imported from a country subject to trade
restrictions
Water utility property
1
15 years1
ADS recovery period
ADS recovery period
25 years
3-Year, 5-Year, 7-Year, 10-Year and 15-Year MACRS Property
Half-Year Convention—General Depreciation System
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
3-year
33.33%
44.45
14.81
7.41
Depreciation Rate for Recovery Period
5-year
20.00%
32.00
19.20
11.52
11.52
5.76
7-year
14.29%
24.49
17.49
12.49
8.93
8.92
8.93
4.46
Asset Description
How Gain is Taxed
MACRS (placed in service after 1986)
Section 1245 property1
Ordinary to extent of depreciation
Ordinary to extent depreciation exceeds SL,
then taxed at 25% maximum rate3 to the extent
of SL depreciation
ACRS (placed in service 1981–1986)
Section 1245 property1 (includes
nonresidential real property if
accelerated depreciation claimed)
Ordinary to extent depreciation exceeds SL,
Section 1250 property2 (includes
then taxed at 25% maximum rate3 to the extent
nonresidential real property if SL
of
SL depreciation
depreciation used and residential
rental property)
Pre-ACRS (placed in service before 1981)
Ordinary to extent post-1975 depreciation
Section 1250 property2—residential
exceeds SL, then taxed at 25% maximum rate3
rental property
to the extent of SL depreciation
Ordinary to extent post-1969 depreciation
Section 1250 property2—
exceeds SL, then taxed at 25% maximum rate3
nonresidential real property
to the extent of SL depreciation
Low-Income Housing
Ordinary to the extent post-1975 depreciation
exceeds SL, reduced by 1% for each full month
held over 100, then taxed at 25% maximum
rate3 to the extent of SL depreciation
Section 197 Intangibles
Amortizable intangibles placed in
Ordinary to the extent of amortization
service after 8/10/93
Note: Depreciation includes regular depreciation, special depreciation and Section 179
expensing.
1
Includes all tangible personal property, single purpose agricultural and horticultural structures,
certain other real property (other than a building and its structural components) that is used
for storage and any real property to the extent of any Section 179 deduction taken.
2
Property that is not Section 1245 property. Includes most buildings and their structural
components.
3
The 25% maximum rate on gain to the extent of SL depreciation claimed applies only
to noncorporate taxpayers.
Section 280F Depreciation Limits
Vehicles Placed in Service Before 20141
ADS recovery period
A 15-year recovery period applied to property placed in service at certain times
before 2014. See Leasehold Improvements on Page 7-9.
Year
Depreciation Recapture Rules
Property Held for Over One Year, Sold at a Gain
10-year
10.00%
18.00
14.40
11.52
9.22
7.37
6.55
6.55
6.56
6.55
3.28
15-year
5.00%
9.50
8.55
7.70
6.93
6.23
5.90
5.90
5.91
5.90
5.91
5.90
5.91
5.90
5.91
2.95
Placed In Service
Cars
Trucks and
Vans
2013
$11,160
$11,360
First year (special depreciation applies)2..................
First year (no special depreciation)..........................
3,160
3,360
Second year.............................................................
5,100
5,400
Third year.................................................................
3,050
3,250
Fourth year and thereafter........................................
1,875
1,975
2012
First year (special depreciation applies)...................
$11,160
$11,360
First year (no special depreciation)..........................
3,160
3,360
Second year.............................................................
5,100
5,300
Third year.................................................................
3,050
3,150
Fourth year and thereafter........................................
1,875
1,875
2011
First year (special depreciation applies)..................
$11,060
$11,260
First year (no special depreciation).........................
3,060
3,260
Second year............................................................
4,900
5,200
Third year................................................................
2,950
3,150
Fourth year and thereafter.......................................
1,775
1,875
2010
First year (special depreciation applies)..................
$11,060
$11,160
First year (no special depreciation).........................
3,060
3,160
Second year............................................................
4,900
5,100
Third year................................................................
2,950
3,050
Fourth year and thereafter.......................................
1,775
1,875
1
Amounts must be pro-rated if less than 100% business use.
2
The special (bonus) depreciation allowance is not available for business vehicles placed
in service after 2013 unless legislation is enacted that extends the provision.
MACRS

Tab 2 Topics
MACRS General Rules............................................ Page 2-1
General Depreciation System (GDS)....................... Page 2-1
Alternative Depreciation System (ADS)................... Page 2-2
Assigning the Recovery Period................................ Page 2-2
Conventions............................................................. Page 2-5
Computing Depreciation.......................................... Page 2-6
Placed In and Taken Out of Service......................... Page 2-6
Alternative Minimum Tax (AMT) Depreciation.......... Page 2-8
Adjusted Current Earnings (ACE)—
C Corporations...................................................... Page 2-9
Farm Property.......................................................... Page 2-9
Short Tax Years...................................................... Page 2-10
Special (Bonus) Depreciation................................ Page 2-12
Qualified Disaster Assistance Property.................. Page 2-14
General Asset Accounts......................................... Page 2-14
Changes in an Asset’s Use.................................... Page 2-16
MACRS General Rules
The Modified Accelerated Cost Recovery System (MACRS)
is used to depreciate most business, rental and investment
property placed in service after 1986.
Under MACRS, compute depreciation by: [IRC §168(a)]
1) Applying an allowable depreciation method,
2) Assigning the asset the proper recovery period and
3) Using the appropriate convention (assumption about
when property is placed in and taken out of service).
MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System
(ADS). The GDS is the method used for regular tax, unless the
ADS is used. The ADS can be elected for any asset. However, its
use is mandatory in certain situations. See Alternative Depreciation
System (ADS) on Page 2-2.
 Note: For alternative minimum tax (AMT), depreciation is
computed under different rules, often resulting in an adjustment
to alternative minimum taxable income. See Alternative Minimum
Tax (AMT) Depreciation on Page 2-8.
Assets are classified under MACRS. The classification generally
determines the depreciation method, convention and recovery
period. See MACRS Property Classification on Page 2-3.
General Depreciation
System (GDS)
Unless the alternative depreciation system (ADS) is required or
elected, the general depreciation system (GDS) applies.
Three depreciation methods are available under the
general depreciation system. For most property,
other than nonresidential real property and residential rental property, the default (no election made) is
the 200% declining balance method over the GDS
recovery period.
Alternatively, taxpayers can elect either the:
1) 150% declining balance method over the GDS recovery period or
2) Straight-line method over the GDS recovery period.
See MACRS Depreciation Methods Available for Regular Tax below
for details on the methods for specific assets.
Elective Depreciation Methods
The election to use a depreciation method other than the default
method is made the year the property is placed in service. Once an
election is made to use a method for an item in a property class, the
same method applies to all property in that class placed in service in
the year of the election.
Exception: The election to use a different depreciation method is
made on a property-by-property basis for nonresidential real and
residential rental property.
Electing a Depreciation Method
Method
150% method
SL
ADS
How to Elect
Enter “150 DB” under column (f) in Part III of Form 4562.
Enter “S/L” under column (f) in Part III of Form 4562.
Complete Section C in Part III of Form 4562.
MACRS Depreciation Methods Available for Regular Tax
Property
General Depreciation System (GDS)
Alternative Depreciation
Elective 150%
System (ADS)2
No Election Made
Elective SL MACRS
1
Declining Balance Method
200% declining balance
Straight-line over GDS Straight-line over ADS
over GDS recovery period. over GDS recovery period. recovery period.
recovery period.
N/A
over GDS recovery period.
Straight-line over GDS
N/A
recovery period.
Three-year, five-year, seven-year and 10-year property
classes (except farm property).
• Farm property (except real property).
• 15-year and 20-year property.
• Nonresidential real property.
• Residential rental property.
• Qualified leasehold improvement property.3
• Qualified restaurant property.3
• Qualified retail improvement property.3
• Trees or vines bearing fruit or nuts.
• 25-year (water utility) property.
1
For property placed in service before 1999, elective 150% declining balance method used the ADS recovery periods.
2
See ADS Recovery Periods on Page 2-2.
3
Expired Provision Alert: This classification expired for property placed in service after 2013. Property that would been classified as such (if placed in service before
2014) is nonresidential real property if placed in service after 2013, unless this provision is extended—tax professionals should watch for developments. However,
regardless of the recovery period assigned, this property is depreciated SL over its GDS (or, if applicable) ADS recovery period.
2014 Tax Year | Depreciation Quickfinder ® Handbook 2-1
Electing a Slower Method
Electing a slower depreciation method (either 150% DB or SL)
results in smaller depreciation deductions for the early years in the
recovery period than what would be available absent the election.
Deferring deductions may allow the taxpayer to use a net operating loss carryover or create passive income to offset passive
losses. Electing 150% DB will also eliminate an AMT adjustment
for those assets, since the same depreciation method will be used
for regular tax and AMT.
System (ADS)
Under the alternative depreciation system, assets are depreciated
straight-line over their ADS recovery period.
When ADS Is Required
The ADS method can be elected for any asset, but is mandatory in
the following situations: [IRC §168(b)(2), 168(g)(1) and 280F(b)(1)]
1) Listed property with 50% or less qualified business use.
2) Tangible property used predominantly outside the U.S. during
the year.
3) Tax-exempt use property.
4) Property financed by tax-exempt bonds.
5) Property used predominantly in a farming business if it is placed
in service in a year an election not to apply the uniform capitalization rules to certain farming costs is in effect (see Farm
Property on Page 2-8).
6) 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.
ADS Recovery Periods
The recovery periods for most property generally are longer under
ADS than they are under GDS.
ADS Recovery Periods1
Property
Recovery Period
Rent-to-own property
4 years
Automobiles and light duty trucks
5 years
Computers and peripheral equipment
5 years
High technology telephone station equipment installed on
customer premises
5 years
High technology medical equipment
5 years
New York Liberty Zone leasehold improvement property
9 years
Personal property with no class life
12 years
Natural gas gathering lines
14 years2
Single purpose agricultural and horticultural structures
15 years
Any tree or vine bearing fruit or nuts
20 years
Electric transmission property used in the transmission at 69
or more kilovolts of electricity
30 years2
Natural gas distribution lines
35 years2
Qualified leasehold improvement property, qualified
restaurant property or qualified retail improvement property
40 years3
40 years
Residential rental property
40 years
Section 1245 real property not listed in Revenue Procedure
40 years
87-56
Railroad grading and tunnel bore
50 years
1
This list is not all-inclusive. The ADS recovery periods for property not listed above
can be found in the tables in Revenue Procedure 87-56 (reproduced at Tab 12).
2
Applicable to property placed in service after April 11, 2005, the original use of
which began after that date (but not applicable if under a binding contract or if
construction began on a self-constructed asset before April 12, 2005).
3
39 years for property placed in service before 2014.
2015
2-2 2014 Tax Year | Depreciation Quickfinder ® Handbook
Tax-exempt use property subject to a lease. The ADS recovery period cannot be less than 125% 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).
Assigning the Recovery Period
The recovery period is the number of years over which an asset’s
basis is recovered under MACRS. Different recovery periods are
often assigned under GDS and ADS.
GDS Recovery Periods
Property is classified under Code Section 168(e). That classification determines the GDS recovery period. See MACRS Property
Classification on Page 2-3.
Revenue Procedure 87-56 Recovery Periods
Revenue Procedure 87-56 (reproduced at Tab 12) lists the recovery
periods for many assets not specified in MACRS
Property Classification on Page 2-3. It also
lists the recovery periods for assets used in
specific activities.
Revenue Procedure 87-56 provides three lives
for the assets listed:
•Class life. This is the class life that was applicable for the property as of January 1, 1986,
under former Section 167(m) and the Class Life
Asset Depreciation Range (CLADR) System, which was used
before 1981. The class life is used to determine the recovery
period for assets not specifically listed in Code Section 168 or
in Revenue Procedure 87-56. However, for the assets listed in
the Revenue Procedure, the recovery periods are specified, so
class life is not needed for determining the recovery period.
•GDS recovery period.
•ADS recovery period.
Specific and nonspecific activities. Revenue Procedure 87-56
contains two tables of Class Lives and Recovery Periods:
•Specific Depreciable Assets Used in All Business Activities, Except as Noted lists assets used in all business activities.(Referred
to as Table B-1 in IRS Publication 946.)
•Depreciable Assets Used in the Following Activities provides
recovery periods for assets used in certain activities. (Referred
to as Table B-2 in IRS Publication 946.)
Using the recovery period tables. To find an asset’s correct recovery period, look at both Table B-1 and Table B-2. Use the tables
in the following order to determine the asset’s recovery period.
1) 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. 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, use the property’s recovery period in Table B-1.
2) 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. If
the activity is listed, use the recovery period shown in the appropriate column following the description.
Continued on Page 2-4
MACRS Property Classification1
Classification
GDS
GDS
Depreciation Recovery Convention
Method2
Period
Examples
3-year property • Tractor units for over-the-road use.
• Any race horse, regardless of age when placed in service.3
• Any horse (other than a race horse) over 12 years old when placed in service.
• Qualified rent-to-own property.4
200%5
Declining
balance
3 years
Half-year or
mid-quarter
5-year property • Automobiles, taxis, buses and trucks.
• Computers and peripheral equipment.
• Office machinery (such as typewriters, calculators and copiers).
• Property used in research and experimentation.
• Breeding cattle and dairy cattle.
• Appliances, carpets, furniture, etc., used in a residential rental real estate activity.
• Certain geothermal, solar and wind energy property.
200%5
Declining
balance
5 years
Half-year or
mid-quarter
7-year property • Office furniture and fixtures (such as desks, files and safes).
2015
• Agricultural machinery and equipment.6
• Motorsports entertainment complex placed in service after October 22, 2004 and before 2014.
• Property that does not have a class life and has not been designated by law as being in any other class.
• Any natural gas gathering line placed in service after April 11, 2005.
200%5
Declining
balance
7 years
Half-year or
mid-quarter
10-year
property
• Vessels, barges, tugs and similar water transportation equipment.
• Single purpose agricultural or horticultural structure (see Tab 7).
• Any tree or vine bearing fruits or nuts.7
• Qualified smart electric meters and qualified smart electric grid systems placed in service after October 3, 2008.8
200%5
Declining
balance
10 years
Half-year or
mid-quarter
15-year
property
• Certain improvements made directly to land or added to it (such as fences, roads and bridges).
• Retail motor fuels outlet (see Tab 7).
• Any municipal wastewater treatment plant.
• Qualified leasehold improvement property (see Tab 7) placed in service before 2014.7
2015
• Qualified restaurant property (see Tab 7) placed in service before 2014.7
7
• Qualified retail improvement property (see Tab 7) placed in service before 2014.
• Initial clearing and grading land improvements for gas utility property placed in service after October 22, 2004.
• 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.
• Any natural gas distribution line placed in service after April 11, 2005 and before 2011.
150%
Declining
balance
15 years
Half-year or
mid-quarter
20-year
property
• Farm buildings (other than single purpose agricultural or horticultural structures).
• Municipal sewers not classified as 25-year property.
• Initial clearing and grading land improvements for electric utility transmission and distribution plants placed
in service after October 22, 2004.
150%
Declining
balance
20 years
Half-year or
mid-quarter
25-year
property9
• 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.
• Municipal sewers placed in service after June 12, 1996, other than property placed in service under a
binding contract in effect at all times since June 9, 1996.
Straight-line
25 years
Half-year or
mid-quarter
27.5 years
Mid-month
39 years
Mid-month
Residential
Any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental Straight-line
rental property income for the tax year is from dwelling units. Note: Units in a hotel, motel or other establishment where more
than half the units are used on a transient basis are not dwelling units (see Tab 7).
Nonresidential Section 1250 property that is neither residential rental property nor property with a class life of less than 27.5
real property10 years (see Tab 7). Examples include office buildings, stores or warehouses.
Straight-line
Expired Provision Alert: Several provisions expired for property placed in service after 2013. It’s possible these provisions will be extended beyond that date. Tax
professionals should watch for developments.
2
Elective methods may be available. See MACRS Depreciation Methods Available for Regular Tax on Page 2-1.
3
Effective for race horses placed in service after December 31, 2008 and before January 1, 2014. Outside of that date range, only race horses more than two years old
when placed in service are 3-year property. [IRC §168(e)(3)(A)]
2015
4
Five years for qualified rent-to-own property placed in service before August 6, 1997.
5
If used in farming, must use 150% instead of 200% declining balance.
6
New farm equipment placed in service in 2009 was five-year property. Five-year treatment was unavailable for grain bins, cotton ginning assets, fences or other land
improvements. [IRC §168(e)(3)(B)(vii)]
7
Must use straight-line method. [IRC §168(b)(3)(E) and (e)(3)(D)(ii)]
8
Must use 150% declining balance method. [IRC §168(b)(2)(C)]
9
20 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996.
10
31.5 years for property placed in service before May 13, 1993.
1
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 seven years for GDS or 12
years for ADS.
Property Used in a Residential Rental Activity
Example #1: GreenCo is a paper manufacturer. During the year, the company
made substantial improvements to the land on which its paper plant is located.
To determine the proper recovery period for the improvements, first check
Table B-1, Specific Depreciable Assets Used in All Business Activities, Except
as Noted. Here, land improvements are listed under Asset Class 00.3. Then
check Table B-2, Depreciable Assets Used in the Following Activities. Here,
GreenCo’s business activity, paper manufacturing, is under Asset Class 26.1,
Manufacture of Pulp and Paper. The proper recovery period is the one under
this asset class because it specifically includes land improvements. The land
improvements have a seven-year GDS recovery period. If the company elects
to use ADS, the recovery period is 13 years.
If only Table B-1 had been considered, Asset Class 00.3, Land Improvements
would have been chosen and a recovery period of 15 years for GDS or 20
years for ADS incorrectly used.
Example #2: RubberCo produces rubber products. During
the year, the company made substantial improvements to
the land on which its rubber plant is located. To determine
the proper recovery period for the improvements, first
check Table B-1. Here, land improvements are under
Asset Class 00.3. Next, check Table B-2, where the company’s
activity, producing rubber products, is listed under Asset Class 30.1, Manufacture of Rubber Products. However, the headings and descriptions under
Asset Class 30.1 do not include land improvements. Therefore, the proper
recovery period to use is that under Asset Class 00.3. The land improvements have a 15-year GDS recovery period. If ADS is elected, 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. Table B-1 shows
office furniture under Asset Class 00.11. Cash registers are not listed in any
of the asset classes in Table B-1. In Table B-2, the business activity, retail
store, is listed 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. Therefore, Asset Class 00.11
from Table B-1 is used for the desk. The desk has a seven-year GDS recovery
period. If the ADS method is elected, the recovery period is 10 years. For the
cash register, Asset Class 57.0 is used because cash registers are not listed
in Table B-1 but are assets used in a retail business. The cash register has a
five-year recovery period for GDS. If the ADS method is elected, the recovery
period is nine years.
IRS Pub. 527
Property Used in Retail/Distributive Trades
or Services
Asset Class 57.0 allows assets used in wholesale and retail trades
and personal and professional services to be depreciated over a
five-year GDS recovery period (nine-year for ADS).
Examples of Retail/Distributive Trades or Services1
Business Type
Personal Services
Examples
Dry cleaners, beauty and barber shops, hotels and
motels, photography studios and mortuaries.
The recovery periods for property used in a residential rental activity
are summarized in the following table.
MACRS Recovery Periods for Property Used in
Residential Rental Activities
Recovery Period in Years
Assets
GDS
ADS
Computers and their peripheral equipment........................ 5....................... 5
Office machinery, such as typewriters,
calculators, copiers.......................................................... 5....................... 6
Automobiles........................................................................ 5....................... 5
Light trucks......................................................................... 5....................... 5
Appliances, such as stoves, refrigerators, etc.................... 5....................... 9
Carpets............................................................................... 5....................... 9
Furniture used in rental property........................................ 5....................... 9
Office furniture and equipment (desks, file
cabinets, etc.).................................................................. 7..................... 10
Any property that does not have a class life and
that has not been designated by law as being in
any other class................................................................ 7..................... 12
Roads............................................................................... 15..................... 20
Shrubbery ........................................................................ 15..................... 20
Fences.............................................................................. 15..................... 20
Residential rental property (buildings or structures,
including mobile homes) and structural components
such as furnaces, waterpipes, venting, etc. Additions
and improvements (such as a new roof) have the
same recovery period as the property to which the
addition or improvement is made, determined as if the
property were placed in service at the same time
as the addition or improvement.................................. 27.5..................... 40
Indian Reservation Property
 Expired Provision Alert: For assets placed in service before
2014, special recovery periods applied to qualified Indian reservation property. This provision is not available for property placed in
service after 2013 unless legislation is enacted to extend it. This discussion is included in the event that the shorter recovery periods are
extended to 2014. If they are not extended, property that formerly
was classified as qualified Indian reservation property and placed
in service in 2014 is depreciated under the general MACRS rules.
The recovery periods for qualified property placed in service on
an Indian reservation after 1993 and before 2014 are shorter than
normal for some property classes. To be eligible for the shorter
recovery periods, the property must be used predominantly in the
active conduct of a trade or business or a rental real estate activity
within an Indian reservation. [IRC §168(j)]
2015
Recovery Periods for Qualified Indian
Reservation Property
Property Classification
Recovery Period
Depreciation Method
Three-year property
Two years
200% DB
Five-year property
Three years
200% DB
Seven-year property
Four years
200% DB
Six years
200% DB
Professional Services
Doctors, dentists, attorneys, accountants, engineers,
architects and veterinarians.
10-year property
Retail Trade
Grocery and department stores, restaurants, cafes,
coin-operated dispensing machines and retail stores.
15-year property
Nine years
150% DB
20-year property
12 years
150% DB
Wholesale
Beverage distributors.
22 years
SL
1
This is not an exhaustive list.
See Tab 4 for optional tables for computing depreciation for qualified Indian
reservation property.
total and may result in the application of the mid-quarter convention for any assets not expensed under Code Section 179. See
the Section 179 Annual Limits table on Page 5-1.
Conventions
Half-Year Convention
Under the half-year convention, all property placed in service or
disposed of during a tax year is treated as placed in service or
disposed of on the midpoint of that tax year [IRC §168(d)(4)].
Thus, half of a full year’s depreciation is taken both in the year
the property is placed in service and in the year of disposition.
The half-year convention applies to all property except:
1) Residential rental and nonresidential real property and
Example: Norm is a calendar-year sole proprietor. He placed the following
assets in service during 2014:
Date
Description
Cost
January........................................ Polishing machine......................... $ 477,000
December.................................... Grinding machine..........................
78,000
Total.................................................................................................... $ 555,000
Norm claims a Section 179 deduction of $78,000 for the grinding machine and
$422,000 for the polishing machine for a total of $500,000 in 2014.
For
the 40% test (to determine if the mid-quarter convention applies) Norm
and a $23,000 Section 179 deduction
counts only the $55,000 ($477,000 – $422,000 expensed under Code Section
for the grinding machine
179) remaining basis in the polishing machine placed in service in January.
Mid-Quarter Convention
The amounts expensed under Code Section 179 are not considered. Thus,
If more than 40% of the basis of property is placed
the mid-quarter convention does not apply to Norm in 2014 since 100% of
in service in the last three months of the year,
the basis of property considered for the test was placed in service in the first
the mid-quarter convention applies to all property
quarter. The $55,000 remaining basis in the polishing machine is depreciated
(other than the Excluded items listed below)
using the half-year convention.
placed in service during the year. [IRC §168(d)
Variation: Now assume that Norm claims a $477,000 Section 179 deduction
(3)]. Then, all property placed in service or disfor the polishing machine. For the 40% test, he has placed $17,000 of assets
posed of during any quarter of a tax year is treated as
the
– $23,000)
thequarter
grinding
in $55,000
service in($78,000
2014: $5,000
($30,000remaining
– $25,000)basis
in theoffirst
andmachine
$12,000in
placed in service, or disposed of, at the midpoint of that quarter.
service
in December.
SinceSince
that is$12,000
100% ofexceeds
the basis$6,800
counted
for the 40%
test,the
100%
in the
fourth quarter.
($17,000
x 40%)
Excluded items. To determine if the mid-quarter convention ap- of Norm’s assets were placed in service in the last three months of the year and the
midquarter convention applies to the assets placed in service in 2014.
plies, the following items are not counted:
mid-quarter convention applies to the grinding machine’s remaining $55,000 basis.
2) Property subject to the mid-quarter convention (discussed
below).
1) Property depreciated under a method other than MACRS.
2) Residential rental property.
3) Nonresidential real property.
4) Property placed in service and disposed of in the same tax
year.
Mid-Month Convention
The mid-month convention applies to residential rental and nonresidential real property. Property placed in service or disposed of
during any month is considered placed in service or disposed of on
the midpoint of that month. So, for the month the asset is placed
in service or disposed of, a half-month of depreciation is taken.
5) Property expensed under Code Section 179.
Pass-through entities. As a general rule, the
40% test is applied at the partnership or S corporation level and not at the individual owner level.
However, if a pass-through entity is formed or used
for the principal purpose of avoiding the mid-quarter
convention or causing the mid-quarter convention to
apply, anti-abuse rules apply. [Reg. §1.168(d)-1(b)(6)]
Effect of mid-quarter convention. If the mid-quarter convention applies, property placed in service in the first half of the year
receives more than a half-year’s worth of depreciation in the year
placed in service while property placed in service in the last half of
the year receives less than a half-year’s worth of depreciation (for
example, property placed in service in the fourth quarter receives
only 12.5% of a full year’s worth of depreciation).
Mid-Quarter Convention Percentages
Quarter
Placed in Service/
Disposed Of
% of Full Year
Depreciation—Placed in
Service Year
% of Full Year
Depreciation—
Disposition Year
First
87.5 %
12.5 %
Second
62.5
37.5
Third
37.5
62.5
Fourth
12.5
87.5
Using the Section 179 deduction to avoid the mid-quarter
convention. The Section 179 election can be used to avoid the
mid-quarter convention by expensing property placed in service
in the last quarter of the tax year. On the other hand, claiming a
Section 179 deduction for assets placed in service during the first
three quarters increases fourth-quarter additions relative to the
Mid-Month Convention Percentages
Month Placed in
Service/Disposed of
% of Full Year
Depreciation—Placed
in Service Year
1
95.83 %
2
87.50
12.50
3
79.17
20.83
4
70.83
29.17
5
62.50
37.50
6
54.17
45.83
7
45.83
54.17
8
37.50
62.50
% of Full Year
Depreciation—
Disposition Year
4.17 %
9
29.17
70.83
10
20.83
79.17
11
12.50
87.50
12
4.17
95.83
Convention in Year of Disposition
If property subject to the half-year convention is
sold, the half-year convention also applies in the
year of the sale. Thus, half a year’s depreciation
is claimed in the year of disposition.
If the mid-quarter convention applied to property in
the year placed in service, the property is treated as
disposed of at the midpoint of the quarter in which the disposition
occurred. See the Mid-Quarter Convention Percentages table in
the previous column for the percentage of a full year’s depreciation
allowed in the year of disposition.
Farm Property Recovery Periods
IRS Pub. 225 and Rev. Proc. 87-56
Recovery Period in Years
Assets
GDS
ADS
Agricultural structures (single purpose).................
10
15
Airplanes (including helicopters) 1.........................
5
6
Automobiles...........................................................
5
5
Calculators and copiers.........................................
5
6
Cattle (dairy or breeding).......................................
5
7
Communication equipment 2..................................
7
10
Computer and peripheral equipment.....................
5
5
Cotton ginning assets............................................
7
12
Drainage facilities..................................................
15
20
Farm buildings .....................................................
20
25
Farm machinery and equipment 4..........................
7
10
Fences (agricultural)..............................................
7
10
Goats and sheep (breeding)..................................
5
5
Grain bins..............................................................
7
10
Hogs (breeding).....................................................
3
3
3
Horses (age when placed in service)
• Breeding and working (12 years or less)...........
7
10
• Breeding and working (more than 12 years).....
3
10
• Racing horses 5..................................................
3
12
Horticultural structures (single purpose)...............
10
15
House trailers for farm laborers—mobile (has
wheels and a history of movement)....................
7
10
House trailers for farm laborers—not mobile
(wheels have been removed and permanent
utilities and pipes are attached to it)...................
20
25
Logging machinery and equipment ....................
5
6
Nonresidential real property.................................
39 7
40
Office furniture, fixtures and equipment (not
calculators, copiers or typewriters).....................
7
10
Paved lots.............................................................
15
20
Residential rental property....................................
27.5
40
Tractor units (over-the-road).................................
3
4
Trees or vines bearing fruit or nuts.......................
10
20
Truck (heavy duty, unloaded weight
13,000 lbs. or more)...........................................
5
6
Truck (actual weight less than 13,000 lbs.)..........
5
5
Vineyard trellising.................................................
7
10
Water wells (for raising poultry and livestock)......
15
20
6
Not including airplanes used in commercial or contract carrying of passengers.
Not including communication equipment listed in other classes.
3
Not including single purpose agricultural or horticultural structures.
4
New farm equipment placed in service in 2009 was five-year (rather than sevenyear) property. Five-year treatment excluded grain bins, cotton ginning assets,
fences or other land improvements.
5
For race horses placed in service after December 31, 2008 and before
January 1, 2014. Outside of that date range, race horses more than two years
old when placed in service are three-year property, and race horses two years
old or younger are seven-year property.
2015
6
Used by logging and sawmill operators for cutting timber.
7
For property placed in service after May 12, 1993; for property placed in service
before May 13, 1993, the recovery period is 31.5 years.
1
2
Example #2: Green Farm, Inc. is actively involved in agricultural activities.
In 2014, Green Farm purchases a 10-acre piece of land that includes a farm
house, hog barns, a general purpose machine shed and a grain bin. Green
Farm also purchases the hog livestock on site. In considering how to depreciate the personal and real property purchased, all the assets purchased are
considered farm assets, subject to the 150% declining balance method, and
assigned the following recovery periods:
• The farm house (Asset Class 01.3) is used to house the farm manager
and is depreciated over 20 years.
• The machine shed (Asset Class 01.3) is a general purpose farm building
subject to 20-year life.
• The hog barns (Asset Class 01.4) qualify as single purpose agricultural
buildings depreciated over 10 years.
• The machinery and equipment (Asset Class 01.1) inside the hog barns
are seven-year property.
• The grain bin (Asset Class 01.1) is seven-year property.
• The breeding hogs (Asset Class 01.23) qualify as three-year property.
Plants With a Preproductive Period of More Than Two Years
Plants producing the following crops or yields have a nationwide weighted
average preproductive period of more than two years: (Notice 2013-18)
• Almonds
• Apples
• Apricots
• Avocados
• Blueberries
• Cherries
• Chestnuts
• Coffee beans
• Currants
• Dates
• Figs
• Grapefruit
• Grapes
• Guavas
• Kiwifruit
• Kumquats
• Lemons
• Limes
• Macadamia
nuts
• Mangoes
• Nectarines
• Olives
• Oranges
• Peaches
• Pears
• Pecans
• Persimmons
• Pistachio nuts
• Plums
• Pomegranates
• Prunes
• Tangelos
• Tangerines
• Tangors
• Walnuts
Short Tax Years
The optional MACRS depreciation tables (see Tab 4) assume that
the tax year property is placed in service and all subsequent tax
years in the recovery period are full 12-month years. When property
is placed in service or subject to depreciation deductions during
a short tax year, special calculations apply. (Rev. Proc. 89-15)
U Caution: The optional MACRS depreciation tables cannot be
used to compute depreciation if at any time during the recovery
period there is a short tax year.
When the Tax Year Begins
The tax year does not begin until the taxpayer engages in a trade
or business. For employee business expense purposes, the tax
year can include any period during which the person is engaged
in a trade or business as an employee, including periods before
assets are placed in service.
Example: On July 1, 2014, ABC Corp. expanded its sales department and
required employees to furnish their own auto as a condition of employment. Bill
has been an employee of ABC for three years; Curt and David are new hires.
Curt previously worked for five years for a similar business; David recently
graduated from college, and this is his first job. All three placed an auto in
service on July 1 as a result of ABC’s requirement.
Bill and Curt do not have a short tax year for the auto placed in service on July 1
because they are considered to have been engaged in a trade or business
for the entire year. Conversely, David has a short tax year beginning with his
employment on July 1.
Placed-in-Service Date in a Short Tax Year
Depreciation in a short year begins on the placed-in-service date
determined under the applicable convention.
Computing Depreciation After a Short Year
For the tax years after the first short year, depreciation may
be computed using either the simplified method or the allocation method (Rev. Proc. 89-15). The method chosen must be
consistently used until the tax year that a switch to the MACRS
straight-line (SL) method is required because it produces a larger
depreciation deduction. Usually, both methods produce the same
depreciation allowance.
Simplified method. Calculate depreciation for a later 12-month
year in the recovery period by multiplying the adjusted basis of
the property at the beginning of the year by the applicable depreciation rate. See Optional Tables Not Used on Page 2-6 for the
applicable rates.
Allocation method. Calculate 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. 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. The denominator is 12. The allowable
depreciation for the tax year is the sum of the depreciation figured
for each recovery year.
Example #1: Mary Jones forms a proprietorship that has a short tax year
beginning March 15 and ending December 31. She is treated as having a
10-month tax year and, under the half-year convention, calculates a $167
($1,000 × 40% × 5 ÷ 12) depreciation allowance for year 1 on a $1,000
asset with a five-year recovery period. If Mary uses the simplified method
for computing depreciation in the following years, her depreciation in years 2
and 3 will be as follows:
Year
Depreciation Allowance
2............................................. ($1,000 – $167) × 40% = $333
3............................................. ($1,000 – $167 – $333) × 40% = $200
Example #2: Assume the same facts as in Example #1, except that the allocation method is used to compute the depreciation in years after the short
year. For the second year, a two-part calculation is required. Seven months of
depreciation is calculated using the method applicable to the first short-year
calculation, and five months of depreciation is computed using the adjusted
basis of $600 ($1,000 original cost less $400 depreciation allowance claimed
in the first 12 months). The calculations for the first three years under this
method are as follows:
Year
1...........
40% × $1,000 × 5/12 = $167
2...........
(40% × $1,000 × 7/12) + (40% × $600 × 5/12) = $333
3...........
(40% × $600 × 7/12) + (40% × $360 × 5/12) = $200
Special (Bonus) Depreciation
 Expired
Provision Alert: For qualified
assets placed in service before 2014, special
depreciation was available. With the exception
of Long Production Period Property and Aircraft
on Page 2-13, special depreciation is not available
for property placed in service after 2013 unless
legislation is enacted to extend it. This discussion
is included in the event that special depreciation is
extended to 2014.
The special depreciation allowance for 2013 generally equals
50% of the property’s basis [IRC §168(k)(1)(A)]. See the Special
Depreciation Percentages table in the next column for percentages for other years.
2014
To be eligible for the special (bonus) depreciation allowance, an
asset must pass four tests: [IRC §168(k)(2)(A)]
1) It must be qualified property. See Qualified Property below.
2) It must be new (see Original Use on Page 2-13).
3) It must be acquired by purchase (a) after 2007 with no written
binding contract to acquire in effect at any time before 2008 or
(b) pursuant to a written binding contract entered into during
2008–2013. For self-constructed property this test is met if the
taxpayer begins manufacturing, constructing or producing the
property during 2008–2013.
2014
4) It must be placed in service before 2014. Exception: See Long
Production Period Property and Aircraft on Page 2-13 for the
extended placed in service date for certain assets.
2015
Special Depreciation Percentages
Date Qualifying Property
Placed in Service
Special Depreciation
Allowance Percentage
Before 2008
0%
1/1/08–9/8/10
50%
9/9/10–12/31/11
100%
2012 – 2014
50%
After 2014
0%
1, 2
3
Must be acquired and placed in service during this period to qualify for 100%
special depreciation. For this test, property is acquired when the taxpayer pays
or incurs the cost of the property. (Rev. Proc. 2011-26)
2
Certain long production period property and aircraft qualify for 100% special
depreciation allowance if placed in service 9/9/10 – 12/31/12.
3
Certain long production period property and aircraft qualify for 50% special
depreciation allowance if placed in service in 2014. See Long Production Period
Property and Aircraft on Page 2-13.
1
Computing the Deduction
2015
Determine the special (bonus) depreciation allowance without any
pro-ration based on when the property was placed in service or for
short tax years. Property placed in service on the last day of the tax
year is eligible for the full special (bonus) depreciation amount. The
special (bonus) depreciation allowance is an additional deduction
computed after any Section 179 deduction
(if applicable) and before regular MACRS
depreciation is calculated.
Qualified Property
To qualify for the special (bonus) depreciation allowance, an asset
must be one of the following: [IRC §168(k)(2)]
1) MACRS asset with a recovery period of 20 years or less,
2) Depreciable computer software other than software amortizable
under Code Section 197 (for example, off-the-shelf software),
3) Water utility property defined in Code Section 168(e)(5) or
4) Qualified leasehold improvement property (see Qualified leasehold improvement property on Page 2-13).
Qualified property does not include:
1) Property placed in service and disposed of in the same tax
year.
2) Property converted from business use to personal use in the
same tax year it is acquired. [Reg. §1.168(k)-1(f)(6)]
3) Property that must be depreciated using the Alternative Depreciation System (ADS). This includes listed property used 50%
or less for business.
4) Property for which taxpayer elected not to claim any special
depreciation allowance.
Qualified leasehold improvement property. A leasehold improvement qualifies for special depreciation if it meets four tests:
[IRC §168(k)(3)]
1) The improvement is to an interior portion of a building.
2) The building is nonresidential real property.
3) The improvement was made pursuant to a lease by the lessee,
sub-lessee or the lessor (landlord) to property to be occupied
exclusively by the lessee or sub-lessee.
4) The improvement is placed in service more than three years
after the date the building was first placed in service.
The following improvements are not qualified leasehold improvement property:
1) The enlargement of a building.
2) An elevator or escalator.
3) Any structural component benefiting a common area.
4) The internal structural framework of a building.
IRS Opinion: Heating, ventilation and air conditioning units installed on the
exterior of a building or on its roof are not qualified leasehold improvement
property since they are not installed to the interior of the building. (CCA
201310028)
U Caution: Leases between related parties do not qualify. Re-
lated parties include an individual and his or her spouse, children,
grandchildren, parents, grandparents and siblings. They also
include an individual and certain entities (for example, corporations) if the individual owns (directly or indirectly) 80% or more of
the entity’s value.
N Observation: Qualified
restaurant property and qualified
retail improvement property (neither of which is eligible for special depreciation on its own) that also fall within the definition of
qualified leasehold improvement property are eligible for special
depreciation. (Rev. Proc. 2011-26)
Original Use
To qualify for the special (bonus) depreciation allowance, the asset must generally be new, rather than pre-owned (that is, original
use must commence with the taxpayer) [IRC §168(k)(2); Reg.
§1.168(k)-1(b)(3)]. However:
•New property acquired after December 31, 2007 for personal use
and subsequently converted to business use meets the original
use requirement.
2015
•Capital expenditures to recondition or rebuild acquired or owned
property satisfy the original use requirement.
•Assets that are reconditioned or rebuilt before the taxpayer buys
them generally don’t meet the original use test, but property containing used parts is not treated as reconditioned or rebuilt if the
cost of the used parts is 20% or less of the property’s total cost.
•Assets placed in service after December 31, 2007 by a person
and then sold to the taxpayer for leaseback to that person within
three months after being placed in service will be treated as a
new asset placed in service by the taxpayer on a date not earlier
than the date it is used first by the lessee under the leaseback
arrangement.
2014
Example: During 2013, Bobcat Company bought a used machine for $20,000
and spent $5,000 to recondition it. The $20,000 purchase price is ineligible
for the special (bonus) depreciation allowance. The $5,000 additional cost to
recondition the machine is eligible for the special (bonus) depreciation allowance, assuming all other requirements are also met.
Long Production Period Property and
Aircraft
2016
Qualified property includes long production period property and
certain noncommercial aircraft placed in service before 2015.
Long production period property. The property must meet the
following requirements: [IRC §168(k)(2)(B)]
1) It has a recovery period of at least 10 years or is tangible personal property used in the trade or business of transporting
people or property.
2) It is subject to the Section 263A uniform capitalization rules.
3) It has an estimated production period exceeding one year and
an estimated production cost exceeding $1,000,000.
Noncommercial aircraft. The aircraft must (1) not be used in the
trade or business of transporting people or property other than for
agricultural or firefighting purposes, (2) be purchased and at the
time of contract for purchase, the purchaser makes a nonrefundable deposit of 10% of the cost (or $100,000, if less) and (3) have
an estimated production period exceeding four months and cost
more than $200,000. [IRC §168(k)(2)(C)]
U Caution: Long production period property that otherwise quali-
fies for special depreciation and that is placed in service in 2014
qualifies for 50% special depreciation only to the extent of adjusted
basis attributable to manufacture, construction or production before
2014. [IRC §168(k)(2)(B)(ii)]
2015
Electing Out of the Special (Bonus)
A taxpayer can elect not to claim special depreciation for any class
of property for any tax year [IRC §168(k)(2)(D); Reg. §1.168(k)1(e)]. The election not to claim special depreciation must be made
for all additions within an entire class placed in service for the tax
year.
The election out of special depreciation is made by attaching a
statement similar to that below to the tax return for the year it is to
be effective. Generally, it must be made by the due date, including
extensions, of the tax return for the tax year in which the qualified
property is placed in service.
Election Out of Special Depreciation
Taxpayer elects under Internal Revenue Code Section 168(k)(2)(D)(iii) to not claim
the additional first-year bonus depreciation deduction (the special depreciation
allowance) for the following classes of property placed in service during the tax
year ended [year-end]: [list property classes for which election is made].
Foregoing Special (Bonus) Depreciation
Allowance to Claim Additional Credits
Corporations may forego the special (bonus) depreciation allowance and instead elect to claim additional research or minimum
tax credits. [IRC §168(k)(4)]
A corporation making the election foregoes the special (bonus)
depreciation deductions and instead increases the limit on the
use of research credits or minimum tax credits. The increases in
the allowable credits are treated as refundable. The depreciation
for qualified property is calculated for both regular tax and AMT
purposes using the straight-line method in place of the method
and 2014
2015
that would otherwise be used.
This provision applies to years ending, and property placed in
service, after March 31, 2008 and before 2010 (2011 for certain
long-lived assets). The election to forego the special depreciation allowance and instead increase the limit on certain credits
is also available for assets placed in service in 2011, 2012, and
2013 (2011–2014 for long production period property and certain
aircraft) [IRC §168(k)(4)(D)]. The election can be made for Round
Two property, or Round Three property, which is property eligible
for the special depreciation allowance solely because it meets
the requirements under the extension of the special depreciation
allowance deduction for certain property placed in service after
2010 (Round Two), or 2012 (Round Three). However, corporations
that have already made this election for an earlier year can elect
to not apply the election to Round Two, or Round Three property.
Also, for Round Two, or Round Three property, the
limit on unused research credits cannot be
increased by making this election.
See Rev. Proc. 2008-65, Rev. Proc. 2009-16
and Rev. Proc. 2009-33 for guidance on making
the election.
or Round Four property
Qualified Recycling and Cellulosic Biofuel
Plant Property
A 50% special (bonus) depreciation allowance applies to certain
reuse and recycling property placed in service after August 31,
2008 [IRC §168(m)], cellulosic biofuel plant property placed in
service after October 3, 2008 and before January 3, 2013 and
second generation biofuel plant property placed in service after
January 2, 2013 and before 2014. [IRC §168(l)]
2015
 Note: These provisions are separate from the special (bonus)
depreciation allowance under Code Section 168(k). Property
qualifying under Code Section 168(k) is not eligible for the special
depreciation allowed under Code Sections 168(l) and 168(m).
Qualified reuse and recycling property is any machinery and
equipment (including software to operate the equipment but not
buildings or real estate) which is used exclusively to collect, distribute or recycle qualified reuse and recyclable materials such as:
•Scrap plastic, glass, textiles, rubber or packaging.
•Recovered fiber.
•Scrap ferrous and nonferrous metals or electronic scrap (such as
cathode ray tubes, flat panel screens, similar video display devices
and central processing units).
Qualified cellulosic biofuel plant property is
property used to make cellulosic biofuel (any
liquid fuel), including ethanol from cellulose, in
the manner prescribed in Code Section 168(l).
Second generation biofuel is any liquid fuel
derived by or from qualified feed stocks. [IRC
§40(b)(6)(E)]
Qualified Disaster
Assistance Property
An additional 50% special (bonus) depreciation allowance was
available for qualified disaster assistance property placed in service after 2007 in federally declared disaster areas for disasters
declared after 2007 and occurring before 2010. [IRC §168(n)]
Qualified disaster assistance property is property used in an active
trade or business that is:
1) MACRS property with a recovery period of 20 years or less,
2) Computer software,
3) Water utility property,
4) Qualified leasehold improvement property,
5) Nonresidential real property or
Qualified disaster assistance property must also meet the following requirements:
1) Substantially all of the property’s use must be in a federally
declared disaster area.
2) The property must replace or rehabilitate property that was
damaged or destroyed.
3) Its first use in the disaster area must begin with the taxpayer.
4) It must be acquired by the taxpayer by purchase on or after
the disaster date, but only if no written binding contract for the
acquisition was in effect before that date.
5) It must be placed in service by the taxpayer on or before the
last day of the third calendar year following the disaster date
(fourth calendar year in the case of nonresidential real property
and residential rental property).
, or 2013 (Round Four)
Recapture
Any special depreciation taken for qualified disaster assistance
property must be recaptured (taken back into income) if the property ceases to be qualified disaster assistance property. Rules similar to those for when property ceases to be Section 179 property
(see Section 179 Recapture on Page 5-9) apply. [IRC §168(n)(4)]
NObservation: To be qualified disaster assistance property,
substantially all of the property’s use must be in the taxpayer’s
trade or business in the disaster area. A similar rule applied for
taking special depreciation on property placed in service in the Gulf
Opportunity (GO) Zone after Hurricane Katrina. The IRS ruled that
if more than 20% of the property’s use was either (1) outside the
GO Zone or (2) not in the active conduct of the taxpayer’s trade
or business in the GO Zone, substantially all of the property’s use
wasn’t for business in the GO Zone. Then, any special depreciation
deduction had to be recaptured. The recaptured amount was the
total depreciation claimed (including special depreciation) for the
property for the years before the recapture year minus the total
depreciation that would have been allowable for those years had
the special depreciation not been claimed (regardless of whether
such excess reduced the taxpayer’s tax liability) (Notice 2006-77).
Presumably, similar rules will apply to recapturing special depreciation taken on qualified disaster assistance property.
General Asset Accounts
In August 2014, the IRS issued a final regulation on general asset accounts, applicable to tax years beginning after 2013 [Reg.
§1.168(i), as issued in TD 9689]. This section covers the final
regulation. See Transition Rules on Page 2-16 for rules for earlier
years.
Quick Guide to MACRS Depreciation Tables
Regular Tax
Property Class
General Depreciation System
No election made
SL Election
(if elected, also use for AMT)
System1
(if elected or required,
also use for AMT)
Alternative Minimum Tax1
Property Placed in Service after 19982, 3
3-year, 5-year, 7-year and
10-year (Nonfarm)
200% DB
GDS recovery period
Tables 1–4
SL
GDS recovery period
Tables 15–19
SL
ADS recovery period
Tables 15–19
150% DB
GDS recovery period
Tables 1–4
10-year (Farm Property)4, 5
150% DB
GDS recovery period
Tables 1–4
SL
GDS recovery period
Tables 15–19
SL
ADS recovery period
Tables 15–19
150% DB
GDS recovery period
Tables 1–4
SL
ADS recovery period
Tables 15–19
If Section 1250 property,
SL
15 years
150% DB
15 years
Table 5
15-year5
150% DB
15 years
Table 5
SL
15 years
Table 5
20-year
Residential Rental
Real Property
Nonresidential Real Property6
150% DB
20 years
Table 6
SL
20 years
Table 6
SL
ADS recovery period
Tables 15–19
SL
20 years
150% DB
20 years
Table 6
SL
27.5 years
Table 7
N/A
SL
40 years
Table 20
SL
27.5 years
Table 7
SL
39 years
Table 9
N/A
SL
40 years
Table 20
SL
39 years
Table 9
Property Placed in Service 1987–19983
10-year (Nonfarm)
200% DB
GDS recovery period
Tables 1–4
SL
GDS recovery period7
Tables 15–19
SL
ADS recovery period
Tables 15–19
150% DB
ADS recovery period
Tables 10–14
10-year (Farm Property placed
in service after 1988)4, 5
150% DB
GDS recovery period
Tables 1–4
SL
GDS recovery period7
Tables 15–19
SL
ADS recovery period
Tables 15–19
150% DB
ADS recovery period
Tables 10–14
15-year
150% DB
15 years
Table 5
SL
15 years7
Table 5
SL
ADS recovery period
Tables 15–19
SL
ADS recovery period
Tables 15–19
20-year
150% DB
20 years
Table 6
SL
20 years7
Table 6
SL
ADS recovery period
Tables 15–19
SL
ADS recovery period
Tables 15–19
Residential Rental Real
Property
SL
27.5 years
Table 7
N/A
SL
40 years
Table 20
SL
40 years
Table 20
Nonresidential Real Property
(placed in service after 1986
and before May 13, 1993)
SL
31.5 years
Table 8
N/A
SL
40 years
Table 20
SL
40 years
Table 20
SL
39 years
Table 9
N/A
SL
40 years
Table 20
SL
40 years
Table 20
Nonresidential Real Property
(placed in service after May 12,
1993 and before 1999)
2014
2015
Can be elected for any asset, if not already required. [IRC §168(b)(2)(D) and (g)(1)(E)]
2
Special (bonus) depreciation is available for qualified property placed in service during 2008–2013 (2014 for certain long production period property and aircraft) [IRC
§168(k)]. See Special (Bonus) Depreciation on Page 2-12 and Tables 21–25.
3
Certain classes of qualified Indian reservation property placed in service during 1994–2013 have a shorter recovery period than the one normally assigned to that class
[IRC §168(j)]. See Indian Reservation Property on Page 2-4 and Tables 26–29.
4
ADS method is required for farm assets when an election to not apply the uniform capitalization rules is in effect. [IRC §263A(e)(2)]
5
Trees and vines bearing fruit or nuts and placed in service after 1988 are depreciated SL over 10 years for regular tax and AMT. [IRC §168(b)(3)(E) and (e)(3)(D)(ii)]
6
Qualified leasehold improvement property and qualified restaurant property placed in service after 10/22/04 and before 2014, and qualified retail improvement property
placed in service during 2009–2013, are depreciated using SL over 15 years for regular tax and AMT and 39 years for ADS [IRC §168(b)(3), (e)(3)(E) and (g)(3)(B)]. See
Leasehold Improvements on Page 7-9 and ADS Recovery Periods on Page 2-2.
7
Use the ADS recovery period for AMT. [IRC §56(a)(1)]
1
Table 1—
Three-Year MACRS
For property placed in service after 1986
2015
200% Declining Balance
• Regular tax depreciation for personal property with three-year recovery period
• Regular tax depreciation for three-year assets used in a farming business.
[includes all racehorses (placed in service after 2008 and before 2014),
• AMT depreciation for property with three-year recovery period placed in service
racehorses over two years old (placed in service before 2009 and after 2013),
after 1998.
other horses more than 12 years old, qualified rent-to-own property, tractors for
• Can be elected for regular tax.
over-the-road use, qualified Indian reservation property that would otherwise have 2014
a 5-year recovery period and assets used in certain activities].
Half-Year
Mid-Quarter Convention—
Half-Year
Year
Year
Convention
Quarter in Which Acquired
Convention
1
2
3
4
1
2
3
4
1.....................33.33%
58.33%
41.67%
25.00%
8.33%
1..................... 25.00%
43.75%
31.25%
18.75%
6.25%
2..................... 44.45
27.78
38.89
50.00
61.11
2......................37.50
28.13
34.38
40.63
46.88
3..................... 14.81
12.35
14.14
16.67
20.37
3......................25.00
25.00
25.00
25.00
25.00
4....................... 7.41
1.54
5.30
8.33
10.19
4......................12.50
3.12
9.37
15.62
21.87
These percentages incorporate the switch from declining-balance (DB) to straight-line (SL) method when SL yields a larger deduction.
Note: For early disposition, multiply the depreciation obtained from these tables by ½ if half-year convention applied. For a disposition of property under the mid-quarter
convention, see Convention in Year of Disposition on Page 2-5.
Table 2—
Five-Year MACRS
• Regular tax depreciation for personal property with five-year recovery period
• Regular tax depreciation for five-year assets used in a farming business.
(includes autos, computers, typewriters, copiers and assets used in certain
• AMT depreciation for property with five-year recovery period placed in service
activities).
after 1998.
Half-Year
Half-Year
Year
Year
Convention
Convention
1
2
3
4
1
2
3
4
1.....................20.00%
35.00%
25.00%
15.00%
5.00%
1...................... 15.00%
26.25%
18.75%
11.25%
3.75%
2..................... 32.00
26.00
30.00
34.00
38.00
2...................... 25.50
22.13
24.38
26.63
28.88
3..................... 19.20
15.60
18.00
20.40
22.80
3...................... 17.85
16.52
17.06
18.64
20.21
4......................11.52
11.01
11.37
12.24
13.68
4...................... 16.66
16.52
16.76
16.56
16.40
5......................11.52
11.01
11.37
11.30
10.94
5...................... 16.66
16.52
16.76
16.57
16.41
6....................... 5.76
1.38
4.26
7.06
9.58
6........................ 8.33
2.06
6.29
10.35
14.35
Table 3—
Seven-Year MACRS
• Regular tax depreciation for personal property with seven-year recovery period
• Regular tax depreciation for seven-year assets used in a farming business.
(includes office furniture and fixtures, horses not eligible for a three-year recovery • AMT depreciation for property with seven-year recovery period placed in service
period and assets used in certain activities).
after 1998.
Half-Year
Half-Year
Year
Year
Convention
Convention
1
2
3
4
1
2
3
4
1..................... 14.29%
25.00%
17.85%
10.71%
3.57%
1......................10.71%
18.75%
13.39%
8.04%
2.68%
2......................24.49
21.43
23.47
25.51
27.55
2......................19.13
17.41
18.56
19.71
20.85
3......................17.49
15.31
16.76
18.22
19.68
3......................15.03
13.68
14.58
15.48
16.39
4......................12.49
10.93
11.97
13.02
14.06
4......................12.25
12.16
12.22
12.27
12.87
5........................8.93
8.75
8.87
9.30
10.04
5......................12.25
12.16
12.22
12.28
12.18
6........................8.92
8.74
8.87
8.85
8.73
6......................12.25
12.16
12.22
12.27
12.18
7........................8.93
8.75
8.87
8.86
8.73
7......................12.25
12.16
12.23
12.28
12.19
8........................4.46
1.09
3.34
5.53
7.64
8........................6.13
1.52
4.58
7.67
10.66
Table 4—
10-Year MACRS
• Regular tax depreciation for personal property with 10-year recovery period
• Regular tax depreciation for 10-year assets used in a farming business (including
(includes boats not used for transportation and assets used in certain activities).
single-purpose farm structures).
• AMT depreciation for personal property with 10-year recovery period placed in
service after 1998.
Half-Year
Half-Year
Year
Year
Convention
Convention
1
2
3
4
1
2
3
4
1......................10.00%
17.50%
12.50%
7.50%
2.50%
1........................ 7.50%
13.13%
9.38%
5.63%
1.88%
2......................18.00
16.50
17.50
18.50
19.50
2...................... 13.88
13.03
13.59
14.16
14.72
3......................14.40
13.20
14.00
14.80
15.60
3...................... 11.79
11.08
11.55
12.03
12.51
4...................... 11.52
10.56
11.20
11.84
12.48
4...................... 10.02
9.41
9.82
10.23
10.63
5........................9.22
8.45
8.96
9.47
9.98
5........................ 8.74
8.71
8.73
8.75
9.04
6........................7.37
7........................6.55
8........................6.55
9........................6.56
10......................6.55
6.76
6.55
6.55
6.56
6.55
7.17
6.55
6.55
6.56
6.55
7.58
6.55
6.55
6.56
6.55
7.99
6.55
6.55
6.56
6.55
6........................ 8.74
7........................ 8.74
8........................ 8.74
9........................ 8.74
10...................... 8.74
8.71
8.71
8.71
8.71
8.71
8.73
8.73
8.73
8.73
8.73
8.75
8.75
8.74
8.75
8.74
8.72
8.72
8.72
8.72
8.71
11.......................3.28
0.82
2.46
4.10
5.74
11....................... 4.37
1.09
3.28
5.47
7.63
Table 5—
15-Year MACRS
2015
Straight-Line
• Regular tax depreciation for property with a 15-year recovery period, including
• Regular tax depreciation for qualified leasehold improvement property and
land improvements (both Section 1245 and 1250 property) and assets used in
qualified restaurant property placed in service after 10/22/04 and before 2014,
and qualified retail improvement property placed in service during 2009–2013.
certain activities.
2014
• AMT depreciation for 15-year property placed in service after 1998 that is Section
1250 property.
• ADS depreciation for assets with 15-year ADS life.
• Can be elected for regular tax and AMT.
Half-Year
Half-Year
Year
Year
Convention
Convention
1
2
3
4
1
2
3
4
1.......................5.00%
8.75%
6.25%
3.75%
1.25%
1....................... 3.33%
5.83%
4.17%
2.50%
0.83%
2....................... 9.50
9.13
9.38
9.63
9.88
2........................6.67
6.67
6.67
6.67
6.67
3....................... 8.55
8.21
8.44
8.66
8.89
3........................6.67
6.67
6.67
6.67
6.67
4....................... 7.70
7.39
7.59
7.80
8.00
4........................6.67
6.67
6.67
6.67
6.67
5....................... 6.93
6.65
6.83
7.02
7.20
5........................6.67
6.67
6.67
6.67
6.67
6....................... 6.23
7....................... 5.90
8....................... 5.90
9....................... 5.91
10..................... 5.90
5.99
5.90
5.91
5.90
5.91
6.15
5.91
5.90
5.91
5.90
6.31
5.90
5.90
5.91
5.90
6.48
5.90
5.90
5.90
5.91
6........................6.67
7........................6.67
8........................6.66
9........................6.67
10......................6.66
6.67
6.67
6.66
6.67
6.66
6.67
6.66
6.67
6.66
6.67
6.67
6.66
6.67
6.66
6.67
6.67
6.67
6.66
6.67
6.66
11...................... 5.91
12..................... 5.90
13..................... 5.91
14..................... 5.90
15..................... 5.91
5.90
5.91
5.90
5.91
5.90
5.91
5.90
5.91
5.90
5.91
5.91
5.90
5.91
5.90
5.91
5.90
5.91
5.90
5.91
5.90
11.......................6.67
12......................6.66
13......................6.67
14......................6.66
15......................6.67
6.67
6.66
6.67
6.66
6.67
6.66
6.67
6.66
6.67
6.66
6.66
6.67
6.66
6.67
6.66
6.67
6.66
6.67
6.66
6.67
16..................... 2.95
0.74
2.21
3.69
5.17
16......................3.33
0.83
2.50
4.17
5.83
These percentages incorporate the switch from declining-balance (DB) to straightline (SL) method when SL yields a larger deduction.
Table 20—
Straight-Line—40-Year Mid-Month Convention
• Alternative Depreciation System for residential rental or nonresidential real property.
• AMT depreciation for residential rental or nonresidential real property placed in service before 1999.
• Can be elected for regular tax and AMT.
Year
Month property placed in service
1
2
3
4
5
6
7
8
9
10
11
12
1.............. 2.396%
2.188%
1.979%
1.771%
1.563%
1.354%
1.146%
0.938%
0.729%
0.521%
0.313%
0.104%
2–40........ 2.500
2.500
2.500
2.500
2.500
2.500
2.500
2.500
2.500
2.500
2.500
2.500
41............ 0.104
0.312
0.521
0.729
0.937
1.146
1.354
1.562
1.771
1.979
2.187
2.396
Note: For early disposition, pro-rate the depreciation from this table for the number of months in service in the disposition year (using mid-month convention).
Table 21—
MACRS with 50% Special (Bonus) Depreciation—All Lives—Half-Year Convention
For qualified property placed in service in 2008–2013 (2014 for certain long production period property and aircraft)
Year
2014
3-year
2015
5-year
7-year
10-year
15-year
20-year
1..............................66.665%
60.000%
57.145%
55.000%
52.500%
51.8750%
2..............................22.225
16.000
12.245
9.000
4.750
3.6095
3................................7.405
9.600
8.745
7.200
4.275
3.3385
4................................3.705
5.760
6.245
5.760
3.850
3.0885
5....................................................................... 5.760
4.465
4.610
3.465
2.8565
6....................................................................... 2.880
4.460
3.685
3.115
2.6425
7.............................................................................................................. 4.465
3.275
2.950
2.4440
8.............................................................................................................. 2.230
3.275
2.950
2.2610
9......................................................................................................................................................3.280
2.955
2.2310
10......................................................................................................................................................3.275
2.950
2.2305
11.......................................................................................................................................................1.640
2.955
2.2310
12.............................................................................................................................................................................................2.950
2.2305
13.............................................................................................................................................................................................2.955
2.2310
14.............................................................................................................................................................................................2.950
2.2305
15.............................................................................................................................................................................................2.955
2.2310
16.............................................................................................................................................................................................1.475
2.2305
17................................................................................................................................................................................................................................. 2.2310
18................................................................................................................................................................................................................................. 2.2305
19................................................................................................................................................................................................................................. 2.2310
20................................................................................................................................................................................................................................. 2.2305
21..................................................................................................................................................................................................................................1.1155
Note: For early disposition, multiply the depreciation obtained from these tables by ½.
Caution: Special (bonus) depreciation will be available in 2014 for certain long production period property and aircraft only, unless legislation is enacted that extends the
provision to other property.
Table 22—
MACRS with 50% Special (Bonus) Depreciation—All Lives—Mid-Quarter Convention,
Property Placed in Service in First Quarter
2014
2015
3-year
5-year
7-year
10-year
15-year
20-year
1..............................79.165%
67.500%
62.500%
58.750%
54.375%
53.2815%
2..............................13.890
13.000
10.715
8.250
4.565
3.5000
3................................6.175
7.800
7.655
6.600
4.105
3.2410
4................................0.770
5.505
5.465
5.280
3.695
2.9980
5....................................................................... 5.505
4.375
4.225
3.325
2.7730
Year
6....................................................................... 0.690
4.370
3.380
7.............................................................................................................. 4.375
3.275
8.............................................................................................................. 0.545
3.275
9......................................................................................................................................................3.280
10......................................................................................................................................................3.275
2.995
2.950
2.955
2.950
2.955
2.5650
2.3730
2.2295
2.2295
2.2295
11.......................................................................................................................................................0.410
2.950
12.............................................................................................................................................................................................2.955
13.............................................................................................................................................................................................2.950
14.............................................................................................................................................................................................2.955
15.............................................................................................................................................................................................2.950
2.2295
2.2300
2.2295
2.2300
2.2295
16.............................................................................................................................................................................................0.370
2.2300
17................................................................................................................................................................................................................................. 2.2295
18................................................................................................................................................................................................................................. 2.2300
19................................................................................................................................................................................................................................. 2.2295
20................................................................................................................................................................................................................................. 2.2300
21................................................................................................................................................................................................................................. 0.2825
Note: For early disposition, see Convention in Year of Disposition on Page 2-5.
Table 23—
Property Placed in Service in Second Quarter
2015
2014
3-year
5-year
7-year
10-year
15-year
20-year
1..............................70.835%
62.500%
58.925%
56.250%
53.125%
52.3440%
2..............................19.445
15.000
11.735
8.750
4.690
3.5740
3................................7.070
9.000
8.380
7.000
4.220
3.3060
4................................2.650
5.685
5.985
5.600
3.795
3.0580
5....................................................................... 5.685
4.435
4.480
3.415
2.8290
Year
6....................................................................... 2.130
4.435
3.585
7.............................................................................................................. 4.435
3.275
8.............................................................................................................. 1.670
3.275
9......................................................................................................................................................3.280
10......................................................................................................................................................3.275
3.075
2.955
2.950
2.955
2.950
2.6165
2.4205
2.2390
2.2315
2.2315
11.......................................................................................................................................................1.230
2.955
12.............................................................................................................................................................................................2.950
13.............................................................................................................................................................................................2.955
14.............................................................................................................................................................................................2.950
15.............................................................................................................................................................................................2.955
2.2315
2.2315
2.2315
2.2315
2.2310
16.............................................................................................................................................................................................1.105
2.2315
17................................................................................................................................................................................................................................. 2.2310
18................................................................................................................................................................................................................................. 2.2315
19................................................................................................................................................................................................................................. 2.2310
20................................................................................................................................................................................................................................. 2.2315
21................................................................................................................................................................................................................................. 0.8365
Table 24—
Property Placed in Service in Third Quarter
2015
2014
3-year
5-year
7-year
10-year
15-year
20-year
1..............................62.500%
57.500%
55.355%
53.750%
51.875%
51.4065%
2..............................25.000
17.000
12.755
9.250
4.815
3.6445
3................................8.335
10.200
9.110
7.400
4.330
3.3710
4................................4.165
6.120
6.510
5.920
3.900
3.1185
5....................................................................... 5.650
4.650
4.735
3.510
2.8845
Year
6....................................................................... 3.530
4.425
3.790
7.............................................................................................................. 4.430
3.275
8.............................................................................................................. 2.765
3.275
9......................................................................................................................................................3.280
10......................................................................................................................................................3.275
3.155
2.950
2.950
2.955
2.950
2.6680
2.4680
2.2830
2.2300
2.2300
11.......................................................................................................................................................2.050
2.955
12.............................................................................................................................................................................................2.950
13.............................................................................................................................................................................................2.955
14.............................................................................................................................................................................................2.950
15.............................................................................................................................................................................................2.955
2.2300
2.2300
2.2305
2.2300
2.2305
16.............................................................................................................................................................................................1.845
2.2300
17.................................................................................................................................................................................................................................. 2.2305
18.................................................................................................................................................................................................................................. 2.2300
19.................................................................................................................................................................................................................................. 2.2305
20.................................................................................................................................................................................................................................. 2.2300
21.................................................................................................................................................................................................................................. 1.3940
Table 25—
Property Placed in Service in Fourth Quarter
2015
3-year
5-year
7-year
10-year
15-year
20-year
1..............................54.165% 2014
52.500%
51.785%
51.250%
50.625%
50.4690%
2..............................30.555
19.000
13.775
9.750
4.940
3.7150
3..............................10.185
11.400
9.840
7.800
4.445
3.4360
4................................5.095
6.840
7.030
6.240
4.000
3.1785
5....................................................................... 5.470
5.020
4.990
3.600
2.9400
Year
6....................................................................... 4.790
4.365
3.995
7.............................................................................................................. 4.365
3.275
8.............................................................................................................. 3.820
3.275
9......................................................................................................................................................3.280
10......................................................................................................................................................3.275
3.240
2.950
2.950
2.950
2.955
2.7195
2.5155
2.3270
2.2290
2.2290
11.......................................................................................................................................................2.870
2.950
12.............................................................................................................................................................................................2.955
13.............................................................................................................................................................................................2.950
14.............................................................................................................................................................................................2.955
15.............................................................................................................................................................................................2.950
2.2290
2.2290
2.2290
2.2290
2.2290
16.............................................................................................................................................................................................2.585
2.2290
17.................................................................................................................................................................................................................................. 2.2290
18.................................................................................................................................................................................................................................. 2.2295
19.................................................................................................................................................................................................................................. 2.2290
20.................................................................................................................................................................................................................................. 2.2295
21.................................................................................................................................................................................................................................. 1.9505
Table 26—
Two-Year Qualified Indian Reservation Property,
200% Declining Balance—Half-Year and Mid-Quarter Conventions
For property placed in service in 1994–2013
Year
2014
Mid-Quarter Convention–Quarter in Which Acquired
1
2
3
4
1....................................... 50.00%
87.50%
62.50%
37.50%
12.50%
2....................................... 50.00
12.50
37.50
62.50
87.50
Note: See Indian Reservation Property on Page 2-4 for more information.
Caution: This shortened recovery period will not be available for property placed in service in 2014 unless legislation is enacted that extends the provision.
Table 27—
Four-Year Qualified Indian Reservation Property,
Year
2014
1
2
3
1.........................................25.00%
43.75%
31.25%
18.75%
2.........................................37.50
28.13
34.37
40.63
4
6.25%
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 28—
Six-Year Qualified Indian Reservation Property,
Year
1.........................................16.67%
2014
1
2
3
29.17%
20.83%
12.50%
4
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
Note: Use Table 1 to compute depreciation for qualified Indian reservation property with a three-year recovery period, and Tables 10–14 to compute depreciation for qualified
Indian reservation property with a nine-year or 12-year recovery period.
Table 29—
22-Year Qualified Indian Reservation Property,
Straight Line—Mid-Month Convention
Year
2014
Month Placed in Service
1
1............4.356%
2
3
4
5
6
7
8
9
10
11
12
3.977%
3.598%
3.220%
2.841%
2.462%
2.083%
1.705%
1.326%
0.947%
0.568%
0.189%
2–3........... 4.545
4.545
4.545
4.545
4.545
4.545
4.545
4.545
4.545
4.545
4.545
4.545
4............4.546
4.546
4.546
4.545
4.545
4.546
4.546
4.545
4.545
4.546
4.546
4.546
5............4.545
4.545
4.545
4.546
4.546
4.545
4.545
4.546
4.546
4.545
4.545
4.545
6............4.546
4.546
4.546
4.545
4.545
4.546
4.546
4.545
4.545
4.546
4.546
4.546
7............4.545
4.545
4.545
4.546
4.546
4.545
4.545
4.546
4.546
4.545
4.545
4.545
8............4.546
4.546
4.546
4.545
4.545
4.546
4.546
4.545
4.545
4.546
4.546
4.546
9............4.545
4.545
4.545
4.546
4.546
4.545
4.545
4.546
4.546
4.545
4.545
4.545
10............4.546
4.546
4.546
4.545
4.545
4.546
4.546
4.545
4.545
4.545
4.546
4.546
11.............4.545
4.545
4.545
4.546
4.546
4.545
4.545
4.546
4.546
4.545
4.545
4.545
12............4.546
4.546
4.546
4.545
4.545
4.546
4.546
4.545
4.545
4.546
4.546
4.546
13............4.545
4.545
4.545
4.546
4.546
4.545
4.545
4.546
4.546
4.545
4.545
4.545
14............4.546
4.546
4.546
4.545
4.545
4.546
4.546
4.545
4.545
4.546
4.546
4.546
15............4.545
4.545
4.545
4.546
4.546
4.545
4.545
4.546
4.546
4.545
4.545
4.545
16............4.546
4.546
4.546
4.545
4.545
4.546
4.546
4.545
4.545
4.546
4.546
4.546
17............4.545
4.545
4.545
4.546
4.546
4.545
4.545
4.546
4.546
4.545
4.545
4.545
18............4.546
4.546
4.546
4.545
4.545
4.546
4.546
4.545
4.545
4.546
4.546
4.546
19............4.545
4.545
4.545
4.546
4.546
4.545
4.545
4.546
4.546
4.545
4.545
4.545
20............4.546
4.546
4.546
4.546
4.545
4.546
4.546
4.545
4.545
4.546
4.546
4.546
21............4.545
4.545
4.545
4.546
4.546
4.545
4.545
4.546
4.546
4.545
4.545
4.545
22............4.546
4.546
4.546
4.545
4.545
4.546
4.546
4.545
4.545
4.546
4.546
4.546
23............0.189
0.568
0.947
1.326
1.705
2.083
2.462
2.841
3.220
3.598
3.977
4.356
Notes
— End of Tab 4 —
Section 179 Expensing

Tab 5 Topics
Expensing Assets Under Code Section 179............ Page 5-1
Annual Deduction Limit............................................ Page 5-1
Increased Limits for Targeted Areas........................ Page 5-2
Business Taxable Income Limit................................ Page 5-3
Pass-Through Entities............................................. Page 5-4
Qualifying Property.................................................. Page 5-6
Comparing Special Depreciation
and Section 179 Expensing................................... Page 5-8
Making the Section 179 Election............................. Page 5-9
Section 179 Recapture............................................ Page 5-9
State Conformity to Federal Special (Bonus)
Depreciation and Section 179 Expensing
Rules................................................................... Page 5-10
U Caution: The Section 179 expense for certain heavy passenger vehicles is limited to $25,000 per vehicle [IRC §179(b)(6)]. See
Section 179 Limit for Heavy Vehicles on Page 6-8.
If Section 179 property is placed in service during a short tax year or part way
through a tax year, the annual deduction
limit is not pro-rated. The limit applies
no matter when during the tax year the
property is placed in service.
Example: Lasso, Inc. started business on December 1, 2014, and has a
December 31 year-end. On December 10, 2014, Lasso placed in service a
machine acquired that day for $25,000. No other depreciable assets were
placed in service during that year. If Lasso so desires, the entire $25,000 may
be expensed under Code Section 179, subject to the business taxable income
limit (see Business Taxable Income Limit on Page 5-3), even though Lasso’s
initial tax year consisted of only one month.
500,000
Expensing Assets Under
Code Section 179
, 2013
Year
Beginning In
Taxpayers can elect to currently deduct some or all
of the cost of certain qualifying property that would
otherwise be subject to depreciation. (See Qualifying
Property on Page 5-6.) This Section 179 deduction
is limited, however, to a maximum annual amount,
which is scaled back when the taxpayer places more
than a certain amount of Section 179 property in service during the tax year. The deduction is also limited
by taxable income.
 Note: The Section 179 limits are for tax years beginning in
a specified year [IRC §179(b)(1)]. Thus, for fiscal year taxpayers, the annual deduction limit and qualifying property phase-out
threshold apply to assets placed in service during the fiscal year.
This is different than the rules for special (bonus) depreciation,
which applies to assets acquired and placed in service during the
calendar year regardless of the taxpayer’s fiscal year. See Tab 2
for a discussion of special (bonus) depreciation.
@ Strategy: Under the tangible property regulations, taxpayers
can also currently expense small items that qualify as materials
or supplies (see Materials and Supplies on Page 1-11). Likewise,
certain taxpayers may qualify for a de minimis expensing rule. See
De Minimis Safe Harbor Election on Page 1-6.
Annual Deduction Limit
The total cost of property that can be expensed any
year is limited to a maximum deduction amount. In
addition, for each dollar of Section 179 property
placed in service during the year over the qualifying property threshold, the maximum deduction is
reduced (but not below zero) by one dollar. See
the Section 179 Annual Limits table in the next
column. Exception: The annual deduction limit and qualifying property threshold are higher for property placed in service in certain
locations. See Increased Limits for Targeted Areas on Page 5-2.
Section 179 Annual Limits
Maximum
Deduction
Qualifying Property
Threshold
2005..................................... $ 105,000........................... $ 420,000
2006........................................ 108,000............................... 430,000
2007........................................ 125,000............................... 500,000
2008 or 2009........................... 250,000............................... 800,000
2014
2010 or 2011............................
500,000............................. 2,000,000 2012 or 2013........................... 500,000............................. 2,000,000
2014 or later............................ 25,0001.............................. 200,0001
The Section 179 limits have been scheduled to fall to these levels in the past and
Congress has raised them. Be alert for developments.
102,000
2,000,000
2,102,000
1
Example: In 2014, Chris placed in service machinery costing $210,000. This
cost is $10,000 more than $200,000, so he must reduce his Section 179 annual
deduction limit to $15,000 ($25,000 − $10,000).
398,000
500,000
102,000
Joint returns. A husband and wife, whether filing
joint or separate returns, are treated as one
taxpayer for the annual deduction limit and
qualifying property threshold. If separate returns are filed, the annual deduction limit (after
any reduction for qualifying property additions
over the threshold) is split in half unless both
spouses elect a different allocation by multiplying
the total limitations by the percentage elected. The sum of the
percentages the taxpayer and spouse elect must equal 100%.
[Reg. §1.179-2(b)]
NObservation: In the case of married individuals filing separate
returns for the year, the individuals are treated as one taxpayer
for purposes of the dollar limitation, the property placed-in-service
limitation, and the taxable income limitation [IRC Sec. 179(b)(4)(A)].
These rules for married individuals apply to legally married samesex individuals. (Rev. Rul. 2013-17)
Controlled group. When a corporation is a member of a controlled
group (greater than 50% ownership), the annual dollar and qualifying property limitations are apportioned among the members of
the group [IRC §179(d)(6)]. In addition, property purchased from
another group member does not qualify as Section 179 property.
See Controlled Groups on Page 5-3 for more information.
Increased Limits for
Targeted Areas
Enterprise Zone Businesses (Pre-2014)
 Expired Provision Alert: For assets placed in service before
2014, increased Section 179 deduction and qualifying property
limits applied to certain enterprise zone businesses. This provision
is not available for property placed in service after 2013 unless
legislation is enacted to extend it. This discussion is included in
the event the increased limits are extended to 2014.
An enterprise zone business (defined in Code Section 1397C)
that places qualified zone property in service in an empowerment
zone before 2014 can increase its Section 179 deduction and
qualifying property limits. See Glossary on Page 13-3 for a list of
the empowerment zones.
Qualified zone property. This is property depreciable under Code
Section 168 (MACRS) that meets all of the following requirements:
(IRC §1397D)
1) The taxpayer acquires it by purchase after the date the empowerment zone designation took effect.
2) Its original use in an empowerment zone commences with
the taxpayer. Used property may qualify as long as it has not
previously been used in the empowerment zone.
3) Substantially all of its use is in an empowerment zone in the
active conduct of a qualified business by the taxpayer in the
zone.
N Observation: Presumably, qualified business in item 3 has
the same meaning as in Code Section 1397C, which defines an
enterprise zone business.
Substantial renovation. Requirements 1 and 2 above are considered satisfied if the taxpayer substantially renovates the property.
Property is substantially renovated if, during any 24-month period
beginning after the date the zone designation takes effect, additions to the taxpayer’s basis of the property exceed the taxpayer’s
adjusted basis at the beginning of the 24-month period (or, if
greater, $5,000).
Sale-leaseback. For requirement 2 above, property that is sold
and leased back by the taxpayer within three months after the date
it was originally placed in service is treated as originally placed in
service not earlier than the date it is used under the leaseback.
Annual deduction limit. The annual Section 179 deduction limit
is increased by the smaller of: [IRC §1397A(a)]
• $35,000 or
• The cost of Section 179 property that is also
qualified zone property placed in service during
the year.
Qualifying property threshold. Only 50% of the
cost of qualified zone property placed in service is
counted when determining whether the qualifying
property threshold has been exceeded.
U Caution: Qualified Section 179 disaster assistance property
(see Disaster Assistance Property Pre-2013 in the next column)
is not treated as qualified zone property unless the taxpayer
elects not to treat the property as qualified Section 179 disaster
assistance property.
Disaster Assistance Property (Pre-2013)
An increased Section 179 deduction was available for qualified
Section 179 disaster assistance property placed in service in a
federally declared disaster area if the disaster was declared after
2007 and occurred before 2010 [IRC §179(e)]. A list of the federally
declared disaster areas is available at www.fema.gov.
Qualified Section 179 disaster assistance property is property that
qualifies for Section 179 expensing (see Qualifying Property on
Page 5-6), is placed in service after 2007 and is qualified disaster
assistance property. Generally, qualified disaster assistance property is property acquired by purchase on or after the applicable
disaster date that rehabilitates or replaces property damaged,
destroyed or condemned as a result of the federally declared
disaster. The property must be placed in service by the last day
of the third calendar year following the applicable disaster date
[IRC §168(n)(2)].
Example: A disaster occurred in a federally declared disaster area on January 2, 2009. John Smith placed property that qualified for Section 179 expensing in service on December 30, 2012. This property meets the requirements
to be considered qualified Section 179 disaster assistance property for 2012
as it was placed in service on or before December 31, 2012 (the end of the
third calendar year following the applicable disaster date).
Annual deduction limit. The annual Section 179 deduction limit
was increased by the smaller of: [IRC §179(e)(1)]
• $100,000 or
• The cost of qualified Section 179 disaster assistance
property placed in service during the year.
Qualifying property threshold. The qualifying property threshold was increased by the
smaller of:
• $600,000 or
• The cost of qualified Section 179 disaster
assistance property placed in service during
the tax year.
Other Targeted Areas
Renewal communities. The increased Section 179 deduction
rules that apply to qualified zone property placed in service by
an enterprise zone business (see Enterprise Zone Businesses in
the preceding column) apply to qualified renewal property placed
in service before 2010 by a renewal community business [IRC
§1400J(a)]. The list of renewal communities can be found at egis.
hud.gov/ezrclocator.
New York Liberty Zone. For NY Liberty Zone assets placed in
service before 2007, the annual expensing limit was increased by
up to $35,000, and only 50% of the cost of qualifying assets was
counted toward the qualifying property threshold. [IRC §1400L(f)]
Gulf Opportunity (GO) Zone. The expensing limit and qualifying property thresholds were increased by up to $100,000 and
$600,000, respectively, for GO Zone property placed in service
before 2008. [IRC §1400N(e)]
Kansas disaster area. The rules for increasing the Section 179
expensing limit that applied to GO Zone property also apply to
qualified recovery assistance property (property placed in service
in the Kansas disaster area) placed in service before 2009. [P.L.
110-246, Sec. 15345(d)(2)]
Recapture of Additional Expensing
If any qualified disaster assistance property placed in service during the year ceases to be qualified disaster assistance property
in a later year, the benefit of the increased Section 179 deduction
must be recaptured. [IRC §179(e)(4)]
Similar rules apply to:
•Qualified zone property that ceases to be used in an empowerment zone by an enterprise business. [IRC §1397A(b)]
•Qualified renewal property that ceases to be used by a renewal
community business in a renewal community. [IRC §1400J(a)]
•Liberty Zone property that ceases to be used in the New York
Liberty Zone. [IRC §1400L(f)(3)]
•GO Zone property that ceases to be GO Zone property.
[IRC §1400N(e)(4)]
•Qualified recovery assistance property that ceases
to be recovery assistance property. [P.L. 110-246,
Sec. 15345(d)(2)]
N Observation: To qualify for the additional
Section 179 expensing discussed in this section,
substantially all of the property must be used in
the taxpayer’s trade or business in the targeted area. If more than
20% of the property’s use is either outside the GO Zone or is not
in the active conduct of a trade or business by the taxpayer in the
GO Zone, the property isn’t used substantially for business in the
GO Zone (Notice 2006-77). This same rule applies to recovery
assistance property placed in service in the Kansas disaster area
(Notice 2008-67). Although these notices deal with recovering
the benefits of special (bonus) depreciation for assets placed in
service in the GO Zone and the Kansas disaster area, presumably
the same rule applies to recapturing the additional Section 179
deduction allowed for assets placed in service in all the targeted
areas described in this section.
Like-kind exchanges and involuntary conversions. See Notice 2008-25 for special depreciation recapture rules that apply
when GO Zone property is exchanged in a like-kind exchange or
involuntary conversion. Presumably, these rules would also apply to other property that had qualified for additional Section 179
expensing in an earlier year.
Business Taxable Income Limit
The Section 179 deduction is limited to the taxpayer’s aggregate
taxable income derived from the active conduct of all trades or
businesses, including: [IRC §179(b)(3); Reg. §1.179-2(c)]
•Business income or loss generated by partnerships, corporations
and LLCs.
•Wages, salaries, tips and other compensation.
•A partner or S corporation shareholder’s pass-through share of
entity taxable income or loss from the active conduct of any of the
entity’s trades or businesses, provided that he is engaged in the
active conduct (that is, he meaningfully participates in management
or operations) of at least one of the entity’s trades or businesses.
•Income or loss from Schedule C and Schedule F.
•Section 1231 gains (or losses) from a trade or business.
•Section 1245 and 1250 depreciation recapture from a trade or
business.
•Interest earned from working capital related to a trade or business.
Business taxable income is not reduced by:
• Any NOL carryover or carryback to the tax
year.
• The deduction for self-employment taxes.
• Unreimbursed employee business expenses.
• The Section 179 deduction.
•Special deductions, such as the dividend received deduction (for
corporations other than S corporations).
 Note: See Pass-through entity’s taxable income on Page 5-5
for special rule for partnerships and S corporations.
Taxable income or losses from investments or hobbies do not count
as income from an active trade or business.
The active conduct of a trade or business for the Section 179 taxable income limit is not the same as material participation under
the Code Section 469 passive activity rules. Income is derived
from an active trade or business for the Section 179 test if the
taxpayer meaningfully participates in the business’s management
or operations [Reg. §1.179-2(c)(6)(ii)]. This includes making highlevel management decisions, even if the everyday operational
decisions are left to an agent or employee.
Example: Adam owns a salon as a sole proprietorship and employs Brenda
to operate it. Adam manages the salon by performing tasks such as reviewing developments relating to the business and approving the annual budget,
while Brenda performs the day-to-day operating functions, including hiring
employees, purchasing supplies and writing checks for bills and salaries.
In 2014, Brenda purchased, for use in the salon and with its funds, qualified
Section 179 equipment for $9,500. Adam’s net income from the salon, before
the Section 179 deduction, was $8,000.
Adam also is a partner in PRS, a partnership that owns a grocery store. Adam
does not participate in the management or operations of the grocery store, and
PRS did not purchase any Section 179 property during 2014. Adam’s allocable
share of partnership net income was $6,000.
Based on the facts and circumstances, Adam meaningfully participates in
the management of the salon but not the grocery store. Therefore, Adam’s
aggregate taxable income derived from the active conduct of any trade or
business is $8,000, the net income from the salon.
@ Strategy: Business taxable income does not have to be generated by the business in which the Section 179 property is used to
count toward the business taxable income limit. In fact, the trade
or business in which the Section 179 property is used can generate a loss, as long as the taxpayer’s net business taxable income
from all sources is positive.
Example: Jon actively conducts the business of his sole proprietorship, which
has a $45,000 loss for 2014 before considering any Section 179 deduction.
He also reports $65,000 of wages and $3,000 of Section 1245 depreciation
recapture from a partnership interest. He is active in the partnership’s business.
Jon’s aggregate business taxable income for the Section 179 taxable income
limit is $23,000 ($65,000 of wages plus $3,000 from the partnership minus
$45,000 loss from the proprietorship). Jon can claim up to $23,000 of Section
179 expense in 2014 (assuming total qualifying property does not exceed
$200,000) for Section 179 property placed in service for his Schedule C activity.
2,000,000
Joint return. If a joint return is filed, the taxable incomes (or
losses) of both spouses are aggregated, even though the Section
179 deduction may be related to the activities of only one spouse.
Example: Sue and Bo file a joint return. Sue has Form W-2 income of $36,000
in 2014. Bo reports a $13,000 business loss from his proprietorship; their aggregate business taxable income for claiming a Section 179 deduction for Bo’s
proprietorship is $23,000 ($36,000 – $13,000). Bo can claim up to $23,000
(smaller of $23,000 or $25,000 limit) of Section 179 expense in 2014 assuming
total qualifying property additions do not exceed $200,000.
500,000
Controlled Groups
2,000,000
Component members of a controlled group (whether or not they
file a consolidated tax return) are treated as a single taxpayer for
the annual expensing limit and the business taxable income limit.
[IRC §179(d)(6)(A)]
For Section 179 purposes, a controlled group is defined by reference to Code Section 1563(a), but using a more-than-50% (instead
of an at least 80%) stock ownership test when determining parentsubsidiary status [IRC §179(d)(7)]. When determining brother-sister
status, both the 80% test and the more-than-50% test apply.
2,200,000
300,000
500,000
200,000
Example: Corporations P, Q, R and S are component members of a controlled
group for Section 179 purposes. The corporations collectively purchased
$220,000 of qualifying Section 179 property in 2014. The group’s maximum
Section 179 deduction for 2014 is $5,000 ($25,000 maximum minus $20,000
excess over the $200,000 qualifying property threshold).
2,000,000
Component members of a controlled group on December 31 of a
given year are treated as one taxpayer for the Section 179 limits
for each member’s tax year that includes that December 31 [Reg.
§1.179-2(b)(7)]. The Section 179 deduction can be taken by any
one component member or allocated among the members in any
manner. Exception: The Section 179 deduction allocated to any
member cannot exceed the cost of Section 179 property actually
purchased and placed in service by that member [Reg. §1.1792(b)(7)(i)]. If the members have different tax years, the tax year
taken into account is the tax year of the member whose tax year
begins on the earliest date.
If a consolidated return is filed for all members of the group, the
allocation is made by the common parent. If separate returns are
filed, the allocation is made pursuant to an agreement entered into
by members of the group.
If a consolidated return is filed for all members of the controlled
group, the allocation may not be revoked after the due date, including extensions, of the common parent’s return on which the Section
179 election is made [Reg. §1.179-2(b)(7)(iii)]. If any members file
separate returns for the tax year including a particular December 31,
the allocation cannot be revoked after the due date, including extensions, of the return of the member whose tax year ends the latest.
S corporations included in controlled group. In an information
letter, the IRS says that even if an S corporation is a member of
a controlled group (based on the 50% ownership test), it is not a
component member of the group. Since the S corporation and
the other group members are not treated as a single taxpayer for
the Section 179 limits, the S corporation can claim the maximum
election amount even if it is a member of a controlled group. (INFO
2013-0016)
U Caution: Information letters are not a ruling and have no binding effect on the IRS. However, the letter is an indication of the
IRS’s current position on this issue. Tax professionals should be
alert for developments.
Planning for the Business Income Limit
Use one of the methods shown below when the Section 179
deduction is reduced by the business taxable income limit. Either
method will result in net income of zero for the current year, but will
provide different rates of cost recovery in future years. Projections
are necessary to determine the better method to use.
Method #1: Determine the amount of Section 179 expense that
will result in a taxable income of zero when combined with depreciation. Remaining basis is recovered via depreciation over future
years. This will avoid the possibility that Section 179 carryovers
are locked up by the taxable business income limit in future years.
 Note: This formula assumes that the default MACRS method
is used, the half-year convention applies and special (bonus)
depreciation is not taken on the asset.
Formula for optimal Section 179 deduction (Method #1)
[ (M × N) – A ] ÷ [ 1 – M ] = D
M = MACRS Recovery Period
A = Asset Cost
N = Business Taxable Income Before
Depreciation and Section 179
Deduction
D = Section 179 Deduction
Example: Martha purchased a previously used five-year MACRS asset on
March 1, 2014, for $105,000. Her business taxable income was $23,700 before
the Section 179 deduction and depreciation.
Using Method #1, the optimal Section 179 deduction is:
(5 × $23,700) – $105,000 = $13,500 =
1–5
<4>
Business taxable income before depreciation
and Section 179 expense...................................................
Section 179 deduction........................................................
MACRS depreciation
($105,000 – $3,375) × 20.00%...........................................
< $3,375>
$ 23,700
< 3,375 >
Net taxable income.............................................................
$
< 20,325 >
0
Method #2: Elect the maximum Section 179 expense available
for the tax year. The amount disallowed because of the business
taxable income limit is carried forward as a Section 179 expense
in the following year. This method is beneficial if income increases
enough in the next year to absorb most or all of the carried forward
Section 179 expense.
the entire $105,000
Example: Using Method #2 for the preceding example, Section 179 election
is made for $25,000 of the basis of the asset placed in service. Only $23,700
is deductible in 2014. The remaining $1,300 ($25,000 – $23,700) carries over
and may be deductible as a Section 179 expense in 2015, subject to the business taxable income limit and the annual deduction limit.
81,300
105,000
Carryovers
Any Section 179 deduction that cannot be deducted because of
the taxable income limit is carried over to the following year [Reg.
§1.179-3(a)]. This disallowed deduction amount is shown on line
13 of Form 4562. It should be entered on the following year’s Form
4562. There is no limit on the number of years a Section 179 deduction can be carried forward. Exception: Special rules apply to
carryforwards attributable to qualified real property. See Qualified
Real Property on Page 5-8.
The carryover is used on a first-in, first-out basis. If costs from more
than one year are carried forward to a year where they cannot all
be utilized, the earliest year carryovers are used first.
If the property is disposed of (including a transfer at death) before
the related carryover is utilized, a Section 179 deduction is not allowed for the remaining carryover amount. Instead, the carryover
is added to the property’s basis.
If more than one property is placed in service in a year, the taxpayer
can select the properties for which all or a part of the costs will be
carried forward. This selection must be shown in the taxpayer’s
books and records. Section 179 costs allocated from a partnership
or an S corporation are treated as one item of Section 179 property.
If no selection is made, the carryover is allocated equally among
the properties expensed for the year.
Pass-Through Entities
Partnerships and S corporations must apply the annual deduction limit, qualifying property limit and business taxable income
limit before passing through any Section 179 expense. The limits
then apply again to each individual partner or shareholder. [Reg.
§1.179-2(b) and (c)]
U Caution: Estates and trusts cannot make Section 179 elec-
tions [IRC §179(d)(4)]. Therefore, the fiduciary must capitalize and
depreciate all tangible personal property placed in service by the
entity. However, see Special (Bonus) Depreciation on Page 2-12,
which is available to estates and trusts in tax years that it applies.
He carries over $19,500 ($94,500 - $75,000) of the elected Section 179 costs to 2015.
500,000
Annual Deduction and Qualifying Property
Limits
The annual deduction limit applies at both the pass-through entity
level and the owner level. In other words, for tax years beginning in 2014, a pass-through entity cannot allocate a Section 179
deduction exceeding $25,000, and an owner cannot deduct a
Section 179 expense (including the amount passed through by the
entity) exceeding $25,000. However, an owner does not include
his allocable share of the pass-through entity’s cost of qualifying
property in determining whether his qualifying property additions
exceed the threshold. [Reg. §1.179-2(b)(3) and (4)]
U Caution: A taxpayer who owns interests in two or more passthrough entities could be allocated Section 179 deductions that exceed the taxpayer’s annual deduction limit. If this occurs, the amount
in excess of the limit is not allowed as a carryforward. The excess
deduction is permanently lost unless the pass-through entities revoke
an appropriate amount of their Section 179 election. In addition,
taxpayers must reduce their basis in the pass-through entities as if
the full Section 179 deductions had been allowed. (Rev. Rul. 89-7)
See Revoking the Election on Page 5-9 for information regarding
revoking a Section 179 election.
Business Taxable Income Limit
The amount of Section 179 expense that can be allocated by a
pass-through entity to its owners cannot exceed the entity’s aggregate business taxable income for that year.
If aggregate business taxable income is less than the deduction
limit, a pass-through entity may still elect expensing up to the
deduction limit, but it cannot pass through the amount that would
reduce its taxable income below zero. That amount is carried
forward at the entity level.
Example: Winston Co. (a calendar-year partnership) owns and operates a
restaurant. During 2014, Winston places in service a cash register costing
$5,000 and office furniture costing $6,000. Both qualify as Section 179 property.
Winston elects under Code Section 179 to expense $11,000.
For 2014, Winston’s taxable income (before any Section 179 deduction) derived
from the active conduct of its restaurant business is $6,000. Therefore, Winston
can pass through only $6,000 ($11,000 – $5,000) of Section 179 expense to
its partners in 2014. The remaining $5,000 is carried forward at the partnership
level. Winston reduces the Section 179 property’s adjusted basis by $11,000,
the full amount elected to be expensed.
Assume that in 2015, Winston makes no fixed asset purchases and generates
$20,000 of business taxable income. It will pass through the $5,000 Section
179 expense carried forward from 2014 to its partners in 2015.
Pass-through entity's taxable income. Business taxable income
for pass-through entities is computed the same way as for all taxpayers (see Business Taxable Income Limit on Page 5-3) except
S corporation deductions for compensation paid to shareholder/
employees and partnership deductions for guaranteed payments
are added back to income.
Example: Kayco, Inc., an S corporation, generated a $65,000 loss from trade
or business activities and $8,000 of income from investment activities in 2014.
Kayco paid its sole shareholder, Kay, $80,000 in salary during 2014. All of this
salary was deducted from the trade or business income. Kayco also purchased
one asset during the year, a $600,000 piece of equipment that is Section 179
property. Kayco’s business taxable income limit is as follows:
Loss from trade or business..................................................
Employee/shareholder wages...............................................
$ <65,000>
80,000
Business taxable income limit...............................................
$ 15,000
Kayco can elect expensing up to $500,000 for 2014, but can only pass through
$15,000 to Kay. The remaining $485,000 ($500,000 – $15,000) is carried
forward at the entity level.
Owner’s share of pass-through entity’s taxable income. For
the business taxable income limit, partners and S corporation
shareholders who are engaged in the active conduct of one or
more of a pass-through entity’s trades or businesses include their
allocable share of taxable income derived from the entity’s active
conduct of any trade or business.
Example: In 2014, Asta Partnership placed in service Section 179 property
costing $2,025,000. Asta must reduce its annual deduction limit by $25,000
($2,025,000 − $2,000,000), so its maximum Section 179 deduction is $475,000.
Asta elects to expense $475,000. Asta’s business taxable income for the year
was $2,500,000, so it can pass through the full $475,000 to its partners. Asta
passes through $9,500 of its Section 179 deduction and $50,000 of its taxable
income to Dean, a partner. Dean is also a partner in Jethro Partnership, which
allocated him a $30,000 Section 179 deduction and $30,000 of taxable income
from the active conduct of its business. He also operates a sole proprietorship
that placed in service qualifying Section 179 property costing $55,000 and
generated a net loss of $5,000 (before considering any Section 179 expense).
Dean does not have to include the partnership’s qualifying property additions
to figure the reduction in his annual deduction limit. His qualifying property
additions for the year are $55,000, so his annual deduction limit is $500,000.
He elects to expense the $39,500 ($9,500 from Asta plus $30,000 from Jethro)
of Section 179 costs passed through from the partnerships plus $5,500 of the
$55,000 of his sole proprietorship’s Section 179 costs, for a total of $94,500.
His deduction of $25,000 does not exceed his business taxable income of
$50,000 ($50,000 from Asta Partnership, plus $30,000 from Jethro Partnership
minus $5,000 loss from his sole proprietorship), so he has no Section 179
deduction carryover to 2015.
is limited to his business taxable income of $75,000.
Basis Adjustments
The pass-through entity reduces its basis in assets for the full
amount of Section 179 expense elected, even if some of the expense cannot be passed through to the owners
due to the business taxable income limit [Reg.
§1.179-1(f)]. The owners, however, reduce
their basis in the partnership or S corporation
only by the amount of Section 179 expense
passed through.
The owner’s basis in his partnership interest or S
corporation stock is reduced even if he gets no current deduction
due to the taxable income limit at the owner level. However, any
Section 179 carryovers remaining when the pass-through entity
is disposed of increase the owner’s basis in the entity and, thus,
reduce the gain (or increase the loss) realized upon the disposition.
Example: Gordon is a general partner in GeeDee and is active in the
partnership’s business. During 2014, GeeDee allocates $15,000 of Section
179 expense and $15,000 of taxable income (all of which is from the active
conduct of a trade or business) to Gordon. Gordon also conducts a business
as a sole proprietor. For 2014, the business incurs an $11,000 tax loss, so his
taxable income limit for Section 179 expensing is $4,000 ($15,000 – $11,000).
Therefore, Gordon can deduct only $4,000 of passed through Section 179
expense and carries over the remaining $11,000. However, he reduces his
basis in GeeDee by $15,000.
On January 1, 2015, Gordon sells his partnership interest. Immediately before
the sale, Gordon increases the adjusted basis of his partnership interest by
$11,000, the Section 179 carryover remaining.
U Caution:
Only the Section 179 expense that was unused
due to the owner’s business taxable income limit increases his
basis when the interest in the entity is disposed of. In contrast,
a basis reduction for passed-through Section 179 expense that
was unused because it exceeded the owner’s annual deduction
limit is permanent.
Carryover from C corporation to S corporation years. A
C corporation may have a Section 179 carryover at the time it
makes an election to be an S corporation. A Section 179 carryover cannot be carried from a C corporation year to an S corporation year. [IRC §1371(b)]
æ Practice Tip: A C corporation that finds itself
in this situation may want to revoke its Section
179 election rather than losing the carryover. See
Revoking the Election on Page 5-9 for further
discussion.
Trusts and Estates as Partners
or Shareholders
While the Section 179 election is made at the pass-through entity
level, the tax benefits are reaped at the owner level. Partners or
shareholders that are trusts or estates are ineligible for the Section
179 expensing privilege. Still, the pass-through entity should consider the election when other partners or shareholders will benefit.
Depreciable personal property additions allocable to trust and estate owners that otherwise would be immediately deducted under
Code Section 179 must be capitalized and depreciated using any
allowable depreciation method. [Reg. §1.179-1(f)(3)]
Qualifying Property
To qualify for the Section 179 deduction, property (new or used)
must be all of the following:
•Eligible property (see Eligible Property in the next column).
•Used more than 50% in an active trade or business in the year
placed in service.
•Acquired by purchase from an unrelated party.
Related persons. For this test, related persons include:
1) An individual and his family members (including only a spouse,
ancestors and lineal descendants). Starting September 16,
2013, the term spouse includes an individual married to a
person of the same sex if they are lawfully married under state
law, even if they are domiciled in a state that does not recognize
the validity of same-sex marriages. (Rev. Rul. 2013-17)
2) A corporation and an individual who owns (directly or indirectly)
more than 50% of the value of the corporation’s stock.
3) Two corporations that are members of the same controlled group.
4) The grantor and fiduciary, and the fiduciary and beneficiary, of
any trust.
5) The executor and beneficiary of any estate.
6) A partnership and a person who directly or indirectly owns more
than 50% of the partnership interest.
See IRS Pub. 946 for additional related parties.
N Observation: Property acquired in a like-kind exchange qualifies for Section 179 expensing only to the extent of any excess
basis (generally, boot given in the trade). See Depreciating Property
After a Like-Kind Exchange on Page 9-6.
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.
Partial business use. When property is used for both business and
nonbusiness purposes, the Section 179 deduction can be elected
only if the property is used more than 50% for business in the year
it is placed in service. Even then, only the business-use portion of
the property qualifies for the Section 179 election.
Property converted from personal use. An asset must meet all
the requirements for expensing in the year it is placed in service.
Property originally acquired for personal use (or 50% or less business use) and later converted to more than 50% business use
does not qualify.
Example: Courtney purchased a computer for $2,000 in 2014. During that year,
she uses it 80% for her business and 20% for personal purposes. Only $1,600
($2,000 × 80%) of the computer’s cost qualifies for the Section 179 election.
Variation: Assume that Courtney uses the computer 40% for business in 2014
and 80% for business in 2015. She cannot take a Section 179 deduction on
this property in any year because it did not meet the requirements for Section
179 expensing (that is, wasn’t used more than 50% for business in the year
it was placed in service).
Listed property purchased by an employee. No Section 179 expense is allowed for listed property (for example, cars, computers
or cameras) purchased by an employee for use in his employer’s
business unless the use of the asset is: [IRC §280F(d)(3)(A)]
1) Required as a condition of employment and
2) For the employer’s convenience.
See Tab 6 for more on listed property.
Eligible Property
To be eligible for the Section 179 deduction, property must be one
of the following types of depreciable property: [IRC §179(d)(1) and
1245(a)(3); Reg. §1.1245-3(c)]
1) Tangible personal property.
2) Other tangible property (except buildings and their structural components) used as:
•An integral part of manufacturing, production
or extraction or of furnishing transportation,
communications, electricity, gas, water or sewage disposal services or
•A research or bulk storage facility used in connection with such activities. (See Other tangible
property below.)
3) Single purpose agricultural (livestock) or horticultural
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 (if placed in service in a tax
year beginning before 2014). 2014
6) Qualified real property placed in service in a tax year beginning
in 2010-2013. See Qualified Real Property on Page 5-8.
Tangible personal property. Tangible personal property is any
tangible property that is not real property. It includes:
•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, mink and
other furbearing animals.
Whether property is 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.
Other tangible property. This is tangible property (other than
buildings and their structural components) described at Regulation
Section 1.48-1(d). Manufacturing, production or extraction includes
construction, reconstruction, or making property out of scrap,
salvage, or junk material, as well as from new or raw material, by
processing, manipulating, refining, or changing an article’s form, or
by combining or assembling two or more articles. It includes cultivat
ing the soil, raising livestock and mining minerals. Eligible property
in this category includes property used as an integral part of the:
•Extraction, processing, or refining of metallic and nonmetallic
minerals, such as oil, gas, rock, marble or slate.
•Construction of roads, bridges or housing.
•Processing of meat, fish or other foodstuffs.
•Cultivation of orchards, gardens or nurseries.
•Operation of sawmills, the production of lumber, lumber products
or other building materials.
•Fabrication or treatment of textiles, paper, leather goods or glass.
•Rebuilding, as distinguished from the mere repairing, of machinery.
Used as an integral part means that the asset is used directly in
the activity and is essential to its completeness. Examples include
storage facilities, fencing used in a farming activity and water wells
that provide water for an activity. Tax professionals should not
overlook this category of Section 179-eligible assets.
Property Eligible for Section 179 Expense1
• Airplanes.
• Automobiles.
• Billboards (if movable).
• Computers.
• Drain tiles used to improve the
drainage of a pasture.
• Fences used in farming business.
• Gasoline storage tanks and pumps
and retail service stations.
• Helicopters.
• House trailers (movable, wheels
attached).
• Livestock (including horses, cattle,
hogs, sheep, goats and mink and
other fur-bearing animals).
• Machinery and equipment.
• Office equipment—copiers,
typewriters, fax machines, etc.
• Office furniture—desks, chairs, file
cabinets, book shelves, etc.
• Off-the-shelf computer software.
• Oil and gas well and drilling equipment.
• Paved barnyards that are used to keep
livestock out of mud and to load them
onto trucks.
• Qualified real property.3
• Signs (if movable).
• Single purpose agricultural or
horticultural structures.
• Storage facility that does not have
additional workspace (for example,
grain bins, corn cribs, silos).
• Store counters.
• Testing equipment.
• Tractors.
• Trucks.
• Vineyards (including vineyards planted
by taxpayer). (CCA 201234024)
• Water wells that provide water for
raising livestock.
Not an exhaustive list.
Placed in service in a tax year beginning in 2003–2013.
3
Placed in service in a tax year beginning in 2010–2013.
2
1
2
2014
Ineligible Property
Section 179 expensing is denied for any property that is: [IRC
§179(d)]
1) Used predominantly to furnish lodging or in connection with
furnishing lodging. See Property Used to Furnish Lodging
below.
2) Used outside of the U.S.
3) Used by certain tax-exempt organizations.
4) Used by certain governmental units, or foreign persons or entities.
5) An air-conditioning or heating unit.
6) Certain property leased to others (see Leased Property in the
next column).
Property Used to Furnish Lodging
A lodging facility is a facility where sleeping accommodations
are provided, such as an apartment, rent house or dormitory. It
is not necessary that rent be charged. Lodging facilities (trailers)
furnished rent-free to employees were lodging facilities. [Union
Pacific Corporation, 91 TC 32 (1988)]
IRS Ruling. A motor home used by an employee for traveling to and lodging
at temporary work locations was used predominantly for lodging when it was
used at least as many days for lodging as for transportation. (TAM 8546005)
Property used in the living quarters of a lodging facility (for example,
beds and other furniture, refrigerators, ranges) is used predominantly
to furnish lodging and is not eligible for the Section 179 deduction.
Also, lobby furniture, office equipment, and laundry and swimming
pool facilities are examples of property used in connection with
furnishing lodging. Finally, property (for example, furniture) leased
to a landlord who uses it to furnish (or in connection with furnishing)
lodging is treated as used to furnish lodging. (Rev. Rul. 81-133)
 Note: Because
property used to furnish lodging does not
qualify as Section 179 property, most taxpayers with residential
rental property cannot claim Section 179 deductions for property
used in connection with the rentals (for example, appliances for
a rent house).
Exception. Some property, even though used in a facility where
sleeping accommodations are provided, is not considered to be
used predominantly to furnish lodging and thus may be eligible
Section 179 property.
Property Not Used Predominantly to Furnish Lodging—
Eligible for Section 179 Expensing
IRC §50(b)(2)
Exception
Assets used in nonlodging
commercial facilities
Assets used in hotel/motel
Certified historic structure
Energy property
Description
Facilities (for example, restaurants, drug stores,
grocery stores, vending machines and coinoperated washers and dryers) available equally to
tenants and nontenants.
More than 50% of the establishment’s living
quarters are used during the year by transients
(rental period normally less than 30 days).
The portion of the basis that is attributable to
qualified rehabilitation expenditures.
Certain equipment that uses solar energy or
energy derived from a geothermal deposit to
produce electricity that meets certain standards of
performance and quality. See Pub. 946 for details.
Leased Property
For noncorporate taxpayers, property leased to others is not eligible
for Section 179 expense, unless:
1) The taxpayer manufactures (or produces) the property or
2) The taxpayer purchases the property to lease to others and
both the following tests are met:
•The term of the lease (including options to renew) is less than
50% of the property's class life.
•For the first 12 months after the property is transferred to the
lessee, the total business deductions on the property exceed
15% of the property’s rental income.
Property Not Eligible for Section 179 Expense
• Air conditioning units.
• Barns.
• Billboards (if not movable).
• Bridges.
• Buildings. Exception: Qualified real
property.
• Car washes.
• Docks.
• Elevators.
• Escalators.
• Fences (not used in farming business).
• Foreign used property.
• Heating units.
• Investment property.
• Land.
• Landscaping.
• Property used to furnish lodging.
• Roads.
• Shrubbery.
• Sidewalks.
• Stables.
• Swimming pools.
• Trailers (nonmobile with wheels
detached and permanent utilities).
• Warehouses.
• Wharves.
Note: This is not an exhaustive list.
– 2014
Qualified Real Property
 Expired Provision Alert: Qualified
real property placed in
service in tax years beginning in 2010–2013 was eligible for Section
179 expensing. This provision is not available for property placed
in service in tax years beginning after 2013 unless legislation is
enacted to extend it. This discussion is included in the event the
provision is extended to tax years beginning in 2014.
For tax years beginning in 2010–2013, qualified real property is
eligible for up to $250,000 of Section 179 expensing.
Qualified real property is any of the following:
1) Qualified leasehold improvement property. 2014
2) Qualified restaurant property.
3) Qualified retail improvement property.
See Qualified Leasehold Improvements on Page 7-9 and Qualified
Restaurant Property and Qualified Retail Improvement Property
on Page 7-10 for definitions.
Qualified real property does not include any property that is listed
under Ineligible Property on Page 5-7.
U Caution: Qualified real property generally is Section 1250
property that is depreciated straight-line, so there is no ordinary
income recapture if the property is sold at a gain. But, to the extent
of any Section 179 expense taken on qualified real property, that
property is reclassified as Section 1245 property, meaning the
Section 179 expense is subject to recapture as ordinary income if
the property is sold at a gain. [IRC §1245(a)(3)(C)]
Limits on carryforward. Any Section 179 deduction for qualified
real property that is unused due to the taxable income limit cannot
be carried to a tax year beginning after 2014 [IRC §179(f)(4)(A)]. Any
carryforward remaining at the end of the taxpayer’s last tax year
beginning in 2014 is treated as placed in service in that last 2014
tax year. If the unused carryforward is due to property actually
placed in service in a tax year other than the taxpayer’s last tax year
beginning in 2014 [generally a tax year beginning in 2010–2013,
but also a tax year beginning in 2014 that is not the taxpayer’s last
tax year beginning in 2014 (where the taxpayer has more than one
tax year beginning in 2014—short tax year situations)], it is treated
as placed in service on the first day of the taxpayer’s last tax year
beginning in 2014 [IRC §179(f)(4)(C)]. If the unused carryforward
is due to property placed in service in the taxpayer’s last tax year
beginning in 2014, the property is treated as if the Section 179
election was never made. [IRC §179(f)(4)(B)]. Note: The Code’s
taxpayer’s last tax year beginning in 2014 wording, as used in
this and the next paragraph, is necessitated by the possibility of a
taxpayer having more than one tax year beginning in 2014 (short
tax year situations).
For the taxpayer’s last tax year beginning in 2014, the Business
Taxable Income Limit on Page 5-3 is determined without considering any depreciation expense on any basis increase due to applying
the carryover limit for qualified real property. [IRC §179(f)(4)(C)]
If the taxpayer has a Section 179 carryforward that arose in a year
that the Section 179 election was made for both qualified real
property and other eligible assets, the carryforward is deemed to
consist of a proportionate amount of each type of property, based
on the cost of each when the Section 179 election was made. The
aggregate amount of the carryover must be allocated pro-rata
between the qualified real property and the other types of Section 179 property (Notice 2013-59). Note also that the $250,000
deduction for qualified real property was originally effective for
tax years beginning in 2010 and 2011, and then later extended to
tax years beginning in 2012 and 2013. Due to the taxable income
limitation, a taxpayer may have disallowed 2010 or 2011 deductions that were treated as placed in service on the first day of the
taxpayer’s last tax year beginning in 2011. These taxpayers may
either (1) continue that treatment; or (2) if the period of limitations
– 2014
for assessment under IRC §6501(a) is open, amend their tax return
for the last tax year beginning in 2011 to carry the 2010 or 2011
disallowed deduction to any tax year beginning in 2012 or 2013. If
this is done, appropriate adjustments must be made on amended
tax returns for any affected succeeding tax years within the time
prescribed for filing an amended return for those years. (See Notice
2013-59 for additional guidance and procedural requirements.)
Example: In 2013, JaneCo (a calendar-year C corporation) elected Section 179
expensing for $25,000 of qualified real property and $50,000 of machinery
and equipment. But, JaneCo’s Section 179 deduction for 2012 was limited
to $60,000 (under the business taxable income limit). JaneCo’s Section 179
carryforward from 2013 is $15,000 ($75,000 – $60,000), which consists of:
Personal Property.............. $15,000 × 50,000 ÷ 75,000..............$10,000
Qualified Real Property....... $15,000 × 25,000 ÷ 75,000..............$ 5,000
JaneCo carries over the $15,000 disallowed Section 179 expense to 2014.
However, in 2014, JaneCo’s business taxable income limit is zero. The $5,000
carryforward related to qualified real property cannot be carried over to 2015.
Instead, it is treated as real property placed in service on January 1, 2014.
The remaining $10,000 is carried forward to 2015.
Comparing Special Depreciation and
Section 179 Expensing
 Expired Provision Alert: For qualified assets placed in service
before 2014, special (bonus) depreciation was available. With the
exception of certain long production period property and aircraft
(see Long Production Period Property and Aircraft on Page 2-13),
special depreciation is not available for property placed in service
after 2013 unless legislation is enacted to extend it. This discussion
is included in the event that special depreciation is extended to 2014.
Use the following table to determine whether property qualifies for
special depreciation, Section 179 expensing or both.
Section 179 Expensing vs.
Special (Bonus) Depreciation Allowance (pre-2014)
Requirement
Section 179
Deduction
Must be placed in service between certain dates?
Can property be used in a rental activity?
Must be new property?
No
No
No
Annual limit (in addition to Section 280F limits
that apply to passenger autos) on amount?
Can be acquired from a related party?
Does property qualify if used 50% or less for
business?
Recapture required if business use of property
falls to 50% or less?
Do qualified leasehold improvements qualify?
Yes
2
Special
Depreciation
Allowance
Yes
Yes
Yes1
No
No
No
Yes
Yes3
Yes
No4
Yes5
Yes
Does qualified restaurant property qualify?
5
Yes
No6
Do qualified retail improvements qualify?
Yes5
No6
Assets converted from personal to business use can qualify, if they were new
when acquired after 2007.
2
Annual deduction limit and business taxable income limits apply. Also, $25,000
per vehicle limit applies to certain heavy passenger vehicles. [IRC §179(b)(5)]
3
Exception: Listed property used 50% or less for business does not qualify.
4
Exception: Recapture required if listed property use falls to 50% or less.
5
2014
If placed in service in a tax year beginning in 2010–2013.
6
Exception: If property also meets the definition of qualified leasehold
improvements, it qualifies for special depreciation allowance.
1
If an asset qualifies for both the special depreciation allowance
and Section 179 expensing, consider the following:
•When determining whether the mid-quarter convention applies,
assets expensed under Code Section 179 are not
counted, but basis deducted as special depreciation
is. Sometimes the mid-quarter convention can be
avoided by claiming the Section 179 deduction
on assets placed in service in the fourth quarter.
•The election out of special depreciation applies to
an entire class of property placed in service during the
tax year. The Section 179 election is made on an assetby-asset basis and taxpayers can elect to expense less than the
full amount of an asset’s basis.
Making the Section 179 Election
The Section 179 election is made on an item-by-item basis for
qualifying property by completing Part I of Form 4562 and filing
the form with: [Reg. §1.179-5(a)]
•The original return filed for the tax year the property was placed
in service (whether or not timely filed) or
•A timely filed amended return. If made on an amended return,
the election must specify the items 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.
Revoking the Election
Tax years beginning after 2002 and before 2015.The Section 179
expensing election (and the selection of the property expensed)
can be revoked without IRS approval by filing an amended return.
The amended return must be filed within the time prescribed by law
for the applicable tax year. However, once the election is revoked,
the Section 179 deduction on that property cannot be reinstated;
that is, the revocation itself is irrevocable. [IRC §179(c)(2)]
Tax years beginning after 2014. The ability to revoke the expense
election without IRS approval is only available for tax years beginning
after 2002 and before 2015. For tax years beginning in 2014 and
later, the election cannot be revoked without IRS consent, unless
Congress enacts legislation extending the prior rule. [IRC §179(c)(2)]
expensed. This is not treated as a revocation of the prior election.
[Reg. §1.179-5(c)(2); Rev. Proc. 2008-54]
Section 179 Recapture
The Section 179 deduction is recaptured as ordinary income if,
in any year during the property’s recovery period (see Assigning
the Recovery Period on Page 2-2), the percentage of business
use drops to 50% or less [Reg. §1.179-1(e)(1)]. The basis of the
underlying property is increased by the recaptured amount.
The amount recaptured equals:
• The 179 deduction claimed minus
• The depreciation that would have been allowable on the Section 179 deduction beginning
with the year placed in service and including
the year of recapture.
Common situations where the recapture rule applies include when
an asset is converted from use in a trade or business to:
•Personal use or
•Use for the production of income (for example, investment use).
Exceptions. Although recapture generally applies when business
use falls to 50% or less, it does not apply to an auto or other listed
property because listed property is subject to separate recapture rules under Code Section 280F. [See Recapturing Excess
Depreciation (Listed Property) on Page 6-4.] Nor does it apply
when the property is sold, but the 179 deduction is treated as
depreciation when calculating ordinary income recapture due to
the sale. See Section 1245 Depreciation Recapture on Page 8-3.
Example: On January 1, 2013, Sal purchased $10,000 of used video equipment
for exclusive use in his advertising business. He expensed the $10,000 under
Code Section 179. On June 15, 2014, Sal purchased new video equipment
for use in his business and converted the equipment purchased in 2013 to
personal use property.
The recapture is calculated as follows:
Section 179 deduction claimed (2013)............................................. $10,000
2013 ($10,000 × 100% business use × 20%)............ $ 2,000
 Note: Only the revocation of the expense election is irrevo-
cable. If a taxpayer did not elect to expense an asset (or elected to
expense only a portion of it) for a particular tax year, an amended
return can still be filed to claim a deduction for the amount not
Minus: Allowable depreciation
(instead of Section 179 expensing)
2014 [$10,000 × 100% business use × 32%
× 50% (half-year convention)].........................
1,600
< 3,600>
2014—Recapture amount................................................................ $ 6,400
Note: Basis in the equipment purchased in 2013 is increased by the $6,400
of recapture income.
Where to Report
When the qualified business use of an asset decreases to 50%
or less, the recapture amount is first entered on Form 4797, Part
IV. This amount is then reported as income on the form where the
deductions were originally claimed. If the Section 179 deduction
was originally claimed on Schedule C or F, the recaptured amount
is subject to SE tax.
Additional Deduction for Targeted Areas
Taxpayers who place Section 179-eligible property in service in
certain targeted areas may qualify for higher expensing limits. If
property that qualified for additional expensing ceases to be used
substantially for business in the targeted area, the additional expensing amount must be recaptured. See Recapture of Additional
Expensing on Page 5-2.
Vehicles and Listed Property

Tab 6 Topics
Business Vehicles—Quick Facts............................. Page 6-1
Special Rules for Listed Property............................ Page 6-2
Business Use Requirement for Listed Property....... Page 6-3
Lessee’s Income Inclusion Amount—Listed
Property Other Than Autos.................................... Page 6-4
Limits on Vehicle Depreciation................................. Page 6-5
Special Depreciation and the
Section 280F Limit................................................. Page 6-7
Section 179 Expensing Rules.................................. Page 6-8
Standard Mileage Rates vs. Actual Costs................ Page 6-9
Leased Vehicles..................................................... Page 6-10
Alternative Motor Vehicle Credit............................ Page 6-11
Credits for Plug-In Vehicles................................... Page 6-12
Lease Income Inclusion Table—Electric Autos...... Page 6-13
Lease Income Inclusion Tables A & B—Property
Other Than Passenger Automobiles.................... Page 6-13
Lease Income Inclusion Tables—Passenger Autos
Leased in 2014 and 2013.................................... Page 6-14
Lease Income Inclusion Tables—Passenger Autos
Leased in 2012 and 2011.................................... Page 6-15
Business Vehicles—Quick Facts
For business vehicles placed in service
2014
2013
2012
2011
2010
2009
Passenger Autos—Unloaded Gross Vehicle Weight 6,000 lbs. or Less
Depreciation limits (Section 280F limits)1,2,3
Placed in service year if special depreciation allowed
$ 11,160
$ 11,160
$ 11,160
$ 11,060
$ 11,060
$ 10,960
Placed in service year if no special depreciation allowed
3,160
3,160
3,160
3,060
3,060
2,960
Second-year limit
5,100
5,100
5,100
4,900
4,900
4,800
Third-year limit
3,050
3,050
3,050
2,950
2,950
2,850
1,875
1,875
1,875
1,775
1,775
1,775
Leased auto income inclusion applies when FMV exceeds
18,500
19,000
18,500
18,500
18,500
18,500
Trucks and Vans—Loaded Gross Vehicle Weight 6,000 lbs. or Less
Depreciation limits (Section 280F limits)1,2,3
Placed in service year if special depreciation allowed
$ 11,460
$ 11,360
$ 11,360
$ 11,260
$ 11,160
$ 11,060
Placed in service year if no special depreciation allowed
3,460
3,360
3,360
3,260
3,160
3,060
Second-year limit
5,500
5,400
5,300
5,200
5,100
4,900
Third-year limit
3,350
3,250
3,150
3,150
3,050
2,950
1,975
1,975
1,875
1,875
1,875
1,775
Leased auto income inclusion applies when FMV exceeds
19,000
19,000
19,000
19,000
19,000
18,500
Vehicles Not Subject to Depreciation Limits
Autos with unloaded gross vehicle weight (GVW) more than 6,000 lbs., trucks and vans with loaded GVW more than 6,000 lbs., and qualified nonpersonal-use
vehicles are not subject to the Code Section 280F depreciation limit.
Heavy Vehicles—Over 6,000 lbs. (unloaded GVW for autos, loaded GVW for trucks and vans) if GVW 14,000 lbs. or less
Section 179 expensing limit—per vehicle4
$ 25,000
$ 25,000
$ 25,000
$ 25,000
$ 25,000
$ 25,000
Depreciation limit (Section 280F limit)
N/A
N/A
N/A
N/A
N/A
N/A
Standard Mileage Rates
51¢: 1/1–6/30
56¢
56.5¢
55.5¢
55.5¢:
50¢
55¢
Business miles
7/1-12/31
Depreciation component of business standard mileage rate
22¢
23¢
23¢
22¢
23¢
21¢
14¢
14¢
14¢
14¢
14¢
14¢
Charitable miles
19¢: 1/1–6/30
23.5¢
24¢
23¢
23.5¢:
16.5¢
24¢
Medical or moving miles
7/1–12/31
1
If any personal use, the limits must be reduced to reflect actual
Section 280F Limit Applies When
business/investment-use percentage.
(Vehicles Placed in Service in 2014)
2
The limits are not reduced if the vehicle is used for less than a
5
Basis equals or exceeds
full year, but are reduced for a short tax year. See Computing
Description
Truck or
Depreciation in a Short Tax Year on Page 2-11.
Auto
Van
3
This limit applies to the sum of any special depreciation allowance (if
available), MACRS depreciation and Section 179 expense claimed.
Qualifies for 50% special depreciation
4
$ 18,600
$ 19,100
Overall limit on Section 179 expensing also applies.
5
Assumes half-year convention applies.
6
The special depreciation allowance is not available for business
Doesn’t qualify for special depreciation
$ 15,800
$ 17,300
vehicles placed in service after 2013 unless legislation is enacted
that extends the provision.
Deduction Limits for Vehicles Placed in Service in 2014
Description
§280F
Depreciation
Limit1
$ 3,1604
$ 3,4604
Maximum
§179
Deduction
$ 3,1604
$ 3,4604
Car—GVW (unloaded) up to 6,000 lbs.
Truck or van—GVW (loaded) up to 6,000 lbs.
• Car—GVW (unloaded) over 6,000 lbs. but
GVW not over 14,000 lbs.
N/A
$ 25,0002
• Truck or van—GVW (loaded) over 6,000 lbs.
but not over 14,000 lbs.
Vehicles described in the preceding row that:
• Are designed to seat more than nine
passengers behind the driver seat (for
example, a hotel shuttle van),
• Have an open cargo area or covered box that is
at least six feet long and not readily accessible
from the passenger compartment (for example,
N/A
$ 500,000
a pick-up with full-size cargo bed) or
• Have an integral enclosure fully enclosing the
driver compartment and load carrying device,
do not have seating behind the driver’s seat
and have no body section protruding more
than 30 inches ahead of the windshield (for
example, a delivery van).
Truck or van—GVW (loaded) over 14,000 lbs.
N/A
$ 500,000
1
First year limit; reduce by any Section 179 expense claimed.
2
Per vehicle limit. Also subject to annual overall limit ($500,000 for 2014).
3
Annual limit for all assets expensed.
4
Plus $8,000 if vehicle qualifies for special (bonus) depreciation.
Depreciating Vehicles Acquired in a Trade
See Depreciating Vehicles Received in a Trade on Page 9-8.
Depreciation After Recovery Period Ends
When depreciation is limited due to the Section 280F limits, a
vehicle will have unrecovered basis at the end of the recovery
period. This basis can be depreciated until the car’s full depreciable
basis is recovered (assuming the vehicle continues to be used for
business or investment). However, depreciation deductions after
the recovery period ends are subject to the Section 280F limit
(adjusted for business/investment use percentage).
After the normal recovery period, unrecovered basis must be
determined to compute the depreciation deduction each year. Unrecovered basis is the vehicle’s cost or other basis reduced by any
clean-fuel vehicle deduction, electric vehicle credit, depreciation
and Section 179 deductions (considering the Section 280F limits)
that would have been allowable if the taxpayer had used the car
100% for business/investment use. [IRC §280F(d)(8)]
N Observation: This rule prevents taxpayers from depreciating the
personal-use portion of the vehicle after the recovery period ends.
Example: In May 2008, Jim bought and placed in service a used luxury car
costing $31,500. The car was five-year MACRS property. Jim did not claim a
Section 179 deduction, and, as used property the car did not qualify for a special
depreciation allowance. He used the car exclusively for business during the recovery period (2008 through 2013). His depreciation deductions are as follows:
Year
MACRS
Depreciation
Percentage
MACRS
Depreciation
Amount
Section 280F
Limit
Depreciation
Allowed
2008...................20%....................$ 6,300............$ 2,960...............$ 2,960
2009................... 32.........................10,080................4,800...................4,800
2010................ 19.2...........................6,048................2,850...................2,850
2011.............. 11.52...........................3,629................1,775...................1,775
2012.............. 11.52...........................3,629................1,775...................1,775
2013................ 5.76......................... 1,814................1,775................. 1,775
Total...............................................$31,500........................................$15,935
At the end of 2013, Jim’s unrecovered basis in the car is $15,565 ($31,500
– $15,935). If in 2014 and later years he continues to use the car 100% for
business, he can deduct each year the lesser of $1,775 or his remaining
unrecovered basis.
Variation: Assume Jim’s business use of the car was only 60%. Then, the
Section 280F limits (and thus his depreciation deductions) would have been
reduced each year. However, when figuring his unrecovered basis in the car
after 2013, he must still reduce his basis by the depreciation allowable as if the
business use had been 100%. So, Jim’s unrecovered basis at the beginning
of 2014 would still be $15,565 ($31,500 – $15,935).
If his business use remained at 60%, Jim’s depreciation expense for 2014
would be the lesser of $1,065 ($1,775 × 60%) or $9,339 (60% of his remaining
unrecovered basis of $15,565). However, even though he deducts $1,065 of
depreciation, his unrecovered basis is reduced by $1,775 (the depreciation
deduction that would be allowed if 100% business use).
U Caution: Depreciation cannot be claimed after the recovery
period ends for listed property other than passenger automobiles.
There is no unrecovered basis at the end of the recovery period because the taxpayer is considered to have used the property 100% for
business and investment purposes during all of the recovery period.
Special Depreciation and the
Section 280F Limit
For assets purchased and placed in service after September 8, 2010
and before 2012, the special depreciation allowance (if available)
was 100% of the asset’s depreciable basis. See Special (Bonus)
Depreciation on Page 2-12.
When depreciation is limited under Code Section 280F, the amount
that cannot be currently deducted becomes unrecovered basis,
which cannot be deducted until after the end of the vehicle’s
recovery period [IRC §280F(a)(1)(B)]. Unrecovered basis can
be deducted after the end of the recovery period, subject to the
Section 280F limit for that year (or years). See Depreciation After
Recovery Period Ends in the previous column).
Under the unrecovered basis rule, claiming 100% special depreciation
results in all of the vehicle’s basis in excess of the first year Section
280F limit becoming unrecovered basis, which cannot be depreciated
until after the end of the vehicle’s recovery period. To mitigate this
result, the IRS allows taxpayers who claimed 100% special depreciation that was limited by Code Section 280F to elect a safe-harbor
accounting method for computing depreciation and unrecovered
basis for years after the placed-in-service year. (Rev. Proc. 2011-26)
Under the safe-harbor rule, taxpayers figure depreciation after
the placed-in-service year as if the special depreciation allowance
in the first year had been 50% rather than 100%. Note: If in the
placed-in-service year there was no unrecovered basis (under the
special accounting rule), taxpayers cannot use the optional depreciation tables for later years. Instead, they must compute 200%
declining balance depreciation on the adjusted depreciable basis.
Example: In 2011, Matt purchased a new car for $20,000 that he used 100%
for business. The car qualified for the 100% special depreciation allowance,
but Matt’s 2011 depreciation was limited to $11,060 (the Section 280F limit).
Matt adopted the special accounting rule. For 2012 and later, Matt is treated
as if he claimed 50% special depreciation for figuring his unrecovered basis
and depreciation deductions:
Deemed 2011 depreciation ($20,000 × 50%) + ($10,000 × 20%)........... $12,000
Actual 2011 depreciation....................................................................... < 11,060>
Unrecovered basis..................................................................................$ 940
The $940 unrecovered basis is recovered beginning in 2017, subject to the
280F limit then in effect.
For 2014, the car’s depreciation is $1,152 (11.52% optional table percentage ×
$10,000 unadjusted depreciable basis if 50% depreciation had been claimed in
2011). Because this amount is less than the 280F limit ($1,775) Matt deducts
the full $1,152 in 2014.
Variation: Assume the same facts except the car cost $18,400. For 2011, Matt’s
100% special depreciation allowance was limited to $11,060 (the Section 280F
limit). Under the safe-harbor accounting method, Matt is deemed to have
claimed 50% special depreciation for determining the car’s unrecovered basis
and its remaining adjusted depreciable basis, as follows:
Deemed 2011 depreciation ($18,400 × 50%) + ($9,200 × 20%)............ $ 11,040
Actual 2011 depreciation........................................................................ < 11,060>
Unrecovered basis (cannot be less than zero)......................................
0
Matt cannot use the optional depreciation tables to compute depreciation on his
car for years after 2011. Instead, he computes depreciation using the 200% declining balance method (assuming the half-year convention applies) as follows:
Beginning unadjusted basis....................................................................$18,400
Less: 2011 actual depreciation.............................................................< 11,060>
2012 and 2013 actual depreciation ($2,936 + $1,762)1......................... < 4,698>
Adjusted basis at 12/31/13................................................................... $ 2,642
200% declining balance rate................................................................. × 40%
2014 depreciation.................................................................................$ 1,057
Because this amount is less than the 280F depreciation limit ($1,775) Matt
deducts $1,057 as depreciation for 2014.
1
2012 depreciation is computed by multiplying the adjusted basis for depreciation
at 12/31/11 ($18,400 – $11,060 = $7,340) by the 40% DDB percentage. 2013
depreciation of $1,762 is computed the same way.
Electing the safe-harbor accounting method. This method is
elected by applying it to deduct depreciation on a vehicle subject to
the Section 280F limits for the first year after the placed-in-service
year. (Rev. Proc. 2011-26)
Section 179 Expensing Rules
Section 179 Limit for Heavy Vehicles
Certain heavy passenger vehicles are subject to a $25,000 limit
on the Section 179 deduction [IRC §179(b)(5)]. The $25,000 limit
is not pro-rated for vehicles with less than 100% business use.
Any four-wheeled vehicle primarily designed to
carry passengers over public streets, roads or
highways that is not subject to the Section
280F depreciation limit and is rated at 14,000
pounds gross vehicle weight or less is subject to the $25,000 limit.
Thus, trucks and vans with a loaded GVW of more than 6,000
pounds and that are rated at no more than 14,000 pounds GVW
are subject to the $25,000 expense limit. Also, autos with an unloaded weight over 6,000 pounds that are rated at 14,000 pounds
GVW or less are subject to the limit.
N Observation: The Code calls the vehicle described on Page
6-8 an SUV, but the $25,000 limit can apply to any vehicle that
meets the definition, such as a pick-up truck or cross-over vehicle
that is not subject to the Section 280F depreciation limit.
The $25,000 Section 179 limit is per vehicle (not
per taxpayer). Therefore, a taxpayer may have
more than one $25,000 limit apply if more than
one vehicle subject to the limit is placed in service during the year. However, the total Section
179 deductions cannot exceed the annual overall
limit (currently $25,000 for 2014).
N Observation: For 2014, the Section 179 per vehicle expens$500,000
ing limit matches the annual overall Section 179 limit of $25,000.
However, in prior years, the annual overall limit has exceeded this
amount. Tax professionals should watch for possible legislative
developments that raise the annual overall limit.
Exception. See Deduction Limits for Vehicles Placed in Service in
2014 on Page 6-7 for three classes of vehicles that meet the weight
requirements for heavy vehicles but are not subject to the $25,000
per vehicle limit on the Section 179 deduction. Note that most pickup
trucks with a cargo bed that is at least six feet long will escape both
the Section 280F limit on depreciation (since their loaded GVW is
over 6,000 pounds) and the $25,000 limit on Section 179 expensing.
Calculating Vehicle Depreciation and Section 179 Deduction
The following worksheet calculates depreciation for a passenger auto placed in service in 2014 under the half-year convention. In each situation, the vehicle is listed property
with a five-year recovery period and is subject to the Section 280F depreciation limits.
1) Business use percentage.
2) Investment use percentage.
3) Business/investment use percentage.
4) Cost or other basis of vehicle.
5) Depreciation method.
6) Depreciation rate (see First-Year MACRS Depreciation Rates for Vehicles on Page 6-9).
7) Section 280F depreciation limit (see Business Vehicles—Quick Facts on Page 6-1).
8) Maximum depreciation deduction. Multiply line 7 by line 3.
9) Section 179 deduction claimed this year (not more than line 8). Enter -0- if this is not the year vehicle
was placed in service or business use percentage (line 1) is 50% or less.
10) Business/investment cost. Multiply line 4 by line 3.
11) Section 179 deduction claimed in the year vehicle placed in service.
12) Tentative basis for depreciation. Subtract line 11 from line 10.
13) Maximum regular depreciation allowed. Subtract line 9 from line 8.
14) Tentative MACRS depreciation deduction. Multiply line 12 by line 6.
15) Enter lesser of the amount on line 13 or 14.
16) Total depreciation for the year (including Section 179 deduction). Add line 15 and line 9.
Used Ford
55%
20%
75%
$
12,000
200% DB
20%
$
3,160
2,370
New Chevy
55%
20%
75%
$
12,000
200% DB
60%
$
11,160
8,370
New Audi
40%
0%
40%
$ 34,000
SL
10%
$
3,160
1,264
713
7,425
0
9,000
713
8,287
1,657
1,657
1,657
2,370
9,000
7,425
1,575
945
945
945
8,370
13,600
0
13,600
1,264
1,360
1,264
1,264
Line 4—The cost of the vehicle is reduced for any adjustments to basis, such as the clean fuel deduction or alternative motor vehicle credit. available for assets placed
Line 5—For the Audi (listed property used 50% or less for business), straight-line is the only method available.
in service in 2014.
Line 6—Special depreciation allowance expired, generally, for assets placed in service after 2013. However, if subsequently renewed in its former form by legislation, the
allowance would not be available for the Ford because it is used, not new, or for the Audi because it is used 50% or less for business.
Line 9—Business use must be more than 50% to claim any Section 179 expense. Amount is calculated to optimize first-year Section 179 expensing. See Formula to
Optimize First-Year Expense on a Vehicle on Page 6-9.
Example: Fred was considering the purchase of a full-sized Ford F150 pickup
truck in 2013 (loaded GVW exceeds 6,000 but not 14,000 pounds), to be used
100% in Fred’s business. He considered two alternatives, both costing around
$40,000. One version had four doors and a 5.5-foot pickup box, while the other
version, also with four doors, had a 6.5-foot pickup box. If Fred purchased the
2014 truck with the 5.5-foot pickup box, his Section 179 deduction for that truck would
be limited to $25,000. If he purchased the truck with the 6.5-foot pickup box,
the $25,000 per vehicle limit on Section 179 expensing would not apply, so
Fred would be able to elect a Section 179 deduction for the truck’s entire cost
in 2013 when the annual overall Section 179 deduction limit was $500,000.
Section 179 Expense for Listed Property
[(Section 280F Limit × Combined Business/
Investment Use Percentage)] – [(First-Year
Depreciation Rate1) × (Combined
Business/Investment
= Use Percentage) × (Asset Cost)]
1 – (First-Year Depreciation Rate1)
See First-Year MACRS Depreciation Rates for Vehicles in the next column.
Example #1: Mark purchases a used car in 2014 for $12,500. He uses the vehicle
100% for business and wants to maximize his Section 179 and depreciation
deductions. Mark’s optimized Section 179 election is calculated as follows:
($3,160 × 100%) – (20% × 100% × $12,500)
80%
$
825
MACRS depreciation ($12,500 – $825) × 20%................................
2,335
Total depreciation (including Section 179 deduction).......................
$ 3,160
Example #2: Assume the same facts as Example #1 except that Mark uses
the vehicle 60% for business and 15% for investment purposes (75% total
deductible use), so his Section 280F limit is $2,370 ($3,160 × 75%). Mark’s
optimized Section 179 election is calculated as follows:
$619 =
($3,160 × 75%) – (20% × 75% × $12,500)
80%
Total Depreciation for 2014 (Proof):
Section 179 deduction.......................................................................
$
619
MACRS depreciation [($12,500 × 75%) – 619] × 20%......................
1,751
Total depreciation (including Section 179 deduction)........................
$ 2,370
60.0%
20%
10.0%
MQ (placed in service in 1st quarter)
67.5
35
17.5
MQ (placed in service in 2nd quarter)
62.5
25
12.5
MQ (placed in service in 3rd quarter)
57.5
15
7.5
MQ (placed in service in 4th quarter)
52.5
5
2.5
2
The 50% special depreciation allowance is generally not available for 2014
unless legislation is enacted that extends the provision.
Required when business use is 50% or less.
Standard Mileage Rates vs.
Actual Costs
Adjustment to basis. For 2014, 22¢ is the deemed depreciation rate for each mile claimed under the standard mileage rate.
(Notice 2013-80)
 Note: The vehicle’s basis cannot be reduced below zero. When
the basis of a vehicle is depreciated to zero, deductions continue
at the standard rate per mile for the year, but no additional basis
adjustments are made.
Example: Bob used the standard mileage rate method to report expenses
from his used car purchased on August 2, 2013, for $18,000. He drove 9,000
and 20,000 business miles during 2013 and 2014, which represented 80%
business use. On December 24, 2014, Bob sells the car.
Bob’s adjusted basis for a sale or trade:
Total
Total Depreciation for 2014 (Proof):
Section 179 deduction......................................................................
HY
 Note: Starting in 2011, the standard mileage rate is available
for autos used for hire, such as taxicabs. (Rev. Proc. 2010-51)
Formula to Optimize First-Year Expense on a Vehicle
$825 =
StraightLine
Method 2
Owned vehicles. Taxpayers must elect to use the standard mileage method in the year the car is placed in service for business
purposes. In later years, taxpayers can switch to the actual expense
method. But if a switch to the actual expense method occurs, the
straight-line method must be used to depreciate the vehicle based
on its remaining useful life. The basis must be reduced by the
depreciation assumed while using the standard mileage method.
if special depreciation applies; $3,160 and $3,460, respectively, if it does not apply.
No Special
Depreciation
Allowance
Standard Mileage Rate Method
When a vehicle’s first year depreciation expense is
less than the Section 280F limit, electing a Section
179 deduction for the vehicle (assuming the vehicle is
eligible) can maximize the first year deductions (up to the
280F limit—for 2014, $3,160 for autos and $3,460 for
trucks and vans). $11,160
$11,460
See the Section 280F Limit Applies When table on
Page 6-1 to determine whether a vehicle’s first-year
depreciation is below the 280F limit.
50% Special
Depreciation
Allowance1
See Comparison of Standard Mileage Rate and Actual Cost Methods (2014) on Page 6-10 for an overview of the methods.
Using Section 179 Expense to Reach
the Section 280F Limit
1
Applicable Convention
1
The Section 179 expense election is available only if an auto, truck
or van that is listed property is used more than 50% for business
in the year it is purchased and placed in service. Any amount
claimed under Code Section 179 reduces the vehicle’s basis for
computing regular MACRS depreciation. Also, the total Section
179 expense plus regular MACRS depreciation for a passenger
automobile may not exceed the Section 280F limit for that year.
Section 179 Deduction
First-Year MACRS Depreciation Rates for Vehicles
Original cost or basis..........................
Less: Depreciation component of
standard mileage rate:
2013 (9,000 × 23¢ per mile)...............
2014 (20,000 × 22¢ per mile).............
Adjusted basis of car..........................
$ 18,000
80%
Business
$ 14,400
20%
Personal
$ 3,600
< 2,070 >
< 4,400 >
$ 11,530
< 2,070 >
< 4,400 >
$ 7,930
0
0
$ 3,600
Total
80%
Business
$ 10,000
< 7,930 >
$ 2,070
20%
Personal
$ 2,500
< 3,600 >
< 1,100 >
Bob’s gain or loss on the sale of the car for $12,500:
Sales proceeds...................................
Adjusted basis....................................
Gain (loss) on sale..............................
$ 12,500
< 11,530 >
$ 970
The $2,070 gain on the business portion is a taxable Section 1231 gain
(subject to Section 1245 recapture) and is reported on Form 4797. The
$1,100 loss on the personal portion is a nondeductible personal loss and
is not reported on Bob’s return. If a gain had been realized on the personal
portion, it would have been reported as long-term capital gain on Form 8949.
Recapture
2011, 2012,
2013, 2014
2010, 2012
2010
The IRS has been instructed to issue regulations on the rules for
recapturing the credits for plug-in vehicles that cease to qualify
for the credits [IRC §30B(h)(8)], except that no recapture will be
required if the vehicle ceases to qualify because it is converted
to a qualified plug-in electric drive motor vehicle. As of the date of
this publication, no regulations have been issued.
Credits for Plug-In Vehicles
Plug-In Electric Drive Motor Vehicle Credit
Taxpayers can claim a credit for each new qualifying vehicle
purchased for use or for lease, but not for resale. The credit
amount ranges from $2,500 to $7,500. The portion of the credit
attributable to the vehicle’s business-use percentage is treated
as part of the taxpayer’s general business credit. The remainder
is a nonrefundable personal credit that can offset both regular tax
and AMT. (IRC §30D)
Qualifying vehicles. These are new four-wheeled plug-in electric
vehicles manufactured primarily for use on public streets, roads
and highways that meet certain technical requirements.
However, the following do not qualify:
1) Vehicles manufactured primarily for off-road use (such as golf
carts).
2) Vehicles weighing 14,000 pounds or more.
3) Low-speed vehicles.
Manufacturer’s certification. The IRS will acknowledge a manufacturer’s (or in the case of a foreign
vehicle manufacturer, its domestic distributor’s) certification that a vehicle meets the standards to qualify for
the credit. Taxpayers may rely on such a certification.
(Notice 2009-89)
Vehicles Certified for the Plug-In Electric
Drive Motor Vehicle Credit1
(Vehicles Acquired After 2009)
2014
2014
2014
2013
2013
2013
2013
2012, 2013, 2014
2014
2014
6-12 Vehicle Description
Accord Plug-In Hybrid
AMP GCE Electric Vehicle
AMP MLE Electric Vehicle
Azure Dynamics Transit Connect Electric
Vehicle
BMW i3 Sedan with Ranger Extender
BMW i3 Sedan
BMW i8
Boulder Electric Delivery Van DV-500
Boulder Electric Shuttle DV500
Boulder Electric Flat Bed DV-500
Boulder Electric Service Body DV-500
BYD e6 Electric Vehicle
Cadillac ELR
Chevrolet Spark EV
2014 Tax Year | Depreciation Quickfinder ® Handbook
2011, 2012
2013, 2014
2012
2012, 2013, 2014
2013, 2014
2013, 2014
2013
2012, 2014
2011, 2012,
2013, 2014
2015
2014
2011
2008, 2009,
2010, 2011
2012, 2013, 2014
2011
2012, 2013, 2014
2012, 2013, 2014
2014
2014
The credit begins to phase out for a manufacturer’s
vehicles when at least 200,000 qualifying vehicles
manufactured by that manufacturer have been sold for use in the
U.S. (determined cumulatively for sales after 2009). As of publication date, no manufacturers had reached that threshold.
 Note: A vehicle is considered acquired on the date when title
to that vehicle passes under state law. (Notice 2009-89)
Model Year
2014
2012
2012
2011, 2012
2010
2010
2011, 2012
2014
2014
2011
2014
1
Chevrolet Volt
7,500
CODA Sedan
Electric Mobile Cars (EMC) Model E36
7 Passenger Wagon
EMC Model E36t Pick-up Truck
EMC Model E36v Utility Van
Electric Vehicles International (EVI) EVI-MD
(Medium Duty) Electric truck
EVI EVI-WI (Walk-In) Electric truck
Fiat 500e
Fisker Karma Sedan
Ford Focus Electric
Ford C-MAX Energi
Ford Fusion Energi
Mercedes-Benz smart Coupe/Cabrio EV
Mitsubishi i-MiEV
Nissan Leaf
7,500
7,500
7,500
7,500
7,500
7,500
7,500
7,500
7,500
4,007
4,007
7,500
7,500
7,500
Porsche 918 Spyder
Porsche Panamera S E Hybrid
smart fortwo Electric Drive Vehicle
Tesla Roadster
3,667
4,751
7,500
7,500
Tesla Model S Vehicle
Think City EV
Toyota Prius Plug-in Electric Drive Vehicle
Toyota RAV4 EV
VIA 2500 Extended Range Electric Passenger
Van
VIA 1500 Extended Range Electric Truck 4WD
(All body styles)
VIA 2500 Extended Range Electric Cargo Van
VIA 1500 Extended Range Electric Truck 2WD
(All body styles)
Wheego LiFe Electric Vehicle
Zenith Electric Van
7,500
7,500
2,500
7,500
7,500
7,500
7,500
7,500
7,500
7,500
Current as of publication date. Check IRS website for updates. Search for “Plug-in
electric drive motor vehicle.”
Reporting
Credit
$ 3,626
7,500
7,500
7,500
7,500
7,500
3,793
7,500
7,500
7,500
7,500
7,500
7,500
7,500
The credit for plug-in electric drive motor vehicles is claimed on
Form 8936. The portion of the credit attributable to business/investment use of the vehicle is part of the general business credit.
The remainder is a personal nonrefundable credit that can offset
regular tax and AMT. It is reported on line 54 of Form 1040 (check
box c and write “8936” in the space next to that box). Any part of
the personal-use portion of the credit that cannot be used is lost.
It cannot be carried over to other years.
2- or 3-Wheeled Electric Vehicles
 Expired Provision Alert: The credit for purchasing qualified
two- or three-wheeled plug-in electric vehicles expired on December 31, 2013. It will not be available in 2014 unless legislation is
enacted that extends the provision.
A credit for purchasing qualified two- or three-wheeled plug-in
electric vehicles was available for vehicles purchased in 2012 and
2013. Among other criteria, the vehicle must be capable of achieving a speed of 45 miles per hour or greater and be manufactured
for use on public roads. The credit equals 10% of the vehicle’s
cost (limited to $2,500). [IRC §30D(g)]
Congress did not extend the credit with the Tax Increase Prevention
Act of 2014; so the credit is not available for 2014.
Real Property

Tab 7 Topics
What Is Real Property?............................................ Page 7-2
Residential Rental Property..................................... Page 7-2
Open-Air Parking Structures ................................... Page 7-2
Billboards................................................................. Page 7-3
Gas Stations and Convenience Stores.................... Page 7-3
Farm Buildings......................................................... Page 7-3
Business Use of Home............................................ Page 7-4
Converting a Residence to Rental Property............ Page 7-4
Effect of Rental or Business Use on Sale of
Residence............................................................. Page 7-5
Land Improvements................................................. Page 7-5
Energy Efficient Commercial Building Deduction..... Page 7-7
Builders of Energy Efficient New Homes Credit....... Page 7-8
Nonbusiness Energy Property Credit...................... Page 7-8
Residential Energy Efficient Property Credit............ Page 7-9
Leasehold Improvements........................................ Page 7-9
Finding Personal Property Included in a
Building’s Cost (Cost Segregation)...................... Page 7-11
Structural Component vs. Personal Property........ Page 7-12
IRS View of Cost Segregation Studies.................. Page 7-13
Quick List—Court Cases on Real vs.
Personal Property................................................ Page 7-15
Guide to Assets Used in Casino/ Hotel Industry.... Page 7-18
Guide to Assets Used in the Restaurant
Industry................................................................ Page 7-23
Guide to Assets Used in a Retail Business............ Page 7-27
Guide to Assets Used in the
Biotech/Pharmaceutical Industry......................... Page 7-31
Guide to Assets Used in the Auto Dealership
Industry................................................................ Page 7-37
IRS Evaluation of Cost Segregation Studies......... Page 7-43
Depreciable Real Property (2014)1
Description
Residential Rental
Property3
Nonresidential Real
Property3
Land Improvements
Billboards classified
as Section 1245
Property
Billboards classified
as Section 1250
Property
Open-Air Parking
Structures
Qualified Leasehold
Improvements
Qualified Restaurant
Property
Qualified Retail
Improvement Property
Retail Motor Fuels
Outlet
Farm Buildings
Single Purpose
Agricultural and
Horticultural
Structures
Definition
Authority
A building or structure if at least 80% of the gross rents are
IRC §168(e)(2)
from a house or apartment (including a mobile home). Does not
include a hotel, motel or other building where more than half of
the units are used on a transient basis.
IRC Section 1250 property that is not (1) residential rental
IRC §168(e)(2)
property or (2) property with a class life of less than 27.5 years.
Includes items such as an office building, store or warehouse.
Depreciable improvements to land, whether classified as
Rev. Proc. 87-56
Section 1245 or Section 1250 property. See Land Improvements (Asset Class 00.3)
on Page 7-5 for when land improvements are depreciable.
Examples include sidewalks, roads, canals, drainage facilities,
sewers, wharves and docks, bridges, fences, landscaping and
radio and TV transmitting towers.
See Billboards on Page 7-3.
Rev. Rul. 80-151,
Rev. Proc. 87-56
(Asset Class 57.1)
See Billboards on Page 7-3.
Rev. Rul. 80-151,
Rev. Proc. 87-56
(Asset Class 57.1)
See Open-Air Parking Structures on Page 7-2.
IRC §168(e)(2)
See Qualified Leasehold Improvements on Page 7-9 for
definition and effective dates.
See Qualified Restaurant Property on Page 7-10 for definition
and effective dates.
See Qualified Retail Improvement Property on Page 7-10 for
definition and effective dates.
See Gas Stations and Convenience Stores on Page 7-3.
IRC §168(b)(3)
and (e)(3)(E)
IRC §168(b)(3)
and (e)(3)(E)
IRC §168(b)(3)
and (e)(3)(E)
IRC §168(e)(3)(E)
Except single-purpose agricultural and horticultural structures.
See Farm Buildings on Page 7-3.
See Farm Buildings on Page 7-3.
Rev. Proc. 87-56
(Asset Class 01.3)
IRC §168(e)(3)(D)
Section
ADS
Regular Tax
AMT
1245 / Recovery Period / Recovery Period / Recovery
1250
Period
Method
Method2
1250
27.5-year / SL
27.5-year / SL
40-year
1250
39-year / SL4
Both
15-year / 150% DB
39-year / SL
40-year
20-year
1245
If Section 1245
property:
15-year / 150% DB;
If Section 1250
property:
15-year / SL
15-year / 150% DB 15-year / 150% DB
1250
15-year / 150% DB
15-year / SL
20-year
1250
39-year / SL4
39-year / SL
40-year
1250
15-year / SL4,5
15-year / SL
39-year
1250
15-year / SL4,5
15-year / SL
39-year
1250
15-year / SL4,5
15-year / SL
39-year
1250
15-year / 150% DB
15-year / SL
20-year
1250
20-year / 150% DB
20-year / SL
25-year
1245
10-year / 150% DB
10-year / 150% DB
15-year
20-year
This table doesn’t cover all types of real property used in specific activities, which may be assigned a shorter recovery period under Rev. Proc. 87-56 (see Tab 12).
Assumes asset placed in service after 1998. If placed in service before 1999, AMT depreciation is over the ADS recovery period. [IRC §168(g) and 56]
3
See Residential Rental Property on Page 7-2.
4
31.5-year / SL if placed in service before 5/13/93.
5
15-year / SL if placed in service at certain times before 2014—see discussion referenced in Definition column.
1
2
What Is Real Property?
Depreciable real property includes buildings and their structural
components, other inherently permanent structures and certain
land improvements. It does not include tangible personal property.
Most depreciable realty is Section 1250 property. However, some
real property is classified as Section 1245 property and thus may
qualify for the Section 179 deduction. Also, for real property classified as Section 1245 property, all depreciation is recaptured when
the property is sold. In contrast, for Section 1250 property placed
in service after 1986, depreciation is recaptured only to the extent
the amount claimed was greater than straight-line. See Tab 8 for
more on depreciation recapture.
Section 179 Expensing for Qualified Real
Property
Generally, Section 1250 property does not qualify for Section 179
expensing. However, see Qualified Real Property on Page 5-8 for
an exception for certain real property placed in service in tax years
beginning in 2010–2013. 2014
 Expired Provision Alert: Section 179 expensing for qualified
real property is not available for property placed in service in tax
years beginning after 2013 unless legislation is enacted to extend
it. Tax professionals should watch for developments.
Special (Bonus) Depreciation for Real
2014
Property
 Expired Provision Alert: Certain new property placed in ser-
vice during 2008–2013 qualifies for a special (bonus) depreciation
allowance [IRC §168(k)]. See Special (Bonus) Depreciation on
Page 2-12 for details.
Although special depreciation has expired for property placed
in service after 2013 (except for certain Long Production Period
Property and Aircraft as discussed on Page 2-13), this discussion is
included in the event that special depreciation is extended to 2014.
Generally, to be eligible, property must have a recovery period of
20 years or less, so most real property will not qualify for special
depreciation. However, the following real property has a recovery
period of 20 years or less and therefore can qualify for special depreciation (provided all other requirements are met):
•Billboards (see Billboards on Page 7-3).
•Retail fuel outlets (see Retail motor fuels outlet on Page 7-3).
•Farm buildings and single purpose agricultural and horticultural
structures (see Farm Buildings on Page 7-3).
•Land Improvements, such as sidewalks, fences and roads (see
Land Improvements on Page 7-5).
•Qualified leasehold improvement property (see Qualified Leasehold Improvements on Page 7-9).
In addition, real property used in specific activities may be assigned a
recovery period of 20 years or less under Revenue Procedure 87-56.
Structures That Are Not Buildings
While a building’s structural components are considered part of
the building and thus, Section 1250 property, structures that are
essentially items of machinery or equipment are not. Likewise,
structures that house an asset used as an integral part of an activity
should not be treated as a building if the structure’s use is closely
related to the asset’s use. This may be the case if:
1) It is expected that the structure will be replaced when the asset
it initially houses is replaced,
2) The structure is specially designed to withstand the stress and
other demands of the asset it houses or
3) The structure cannot be used economically for other purposes.
Thus, structures such as oil and gas storage
tanks, grain storage bins, silos, fractionating
towers, blast furnaces, basic oxygen furnaces,
coke ovens, brick kilns and coal tipples are not
treated as buildings [Reg. §1.48-1(e)]. These
structures are often assigned a recovery period
based on the activity in which they are used. See
Revenue Procedure 87-56 (reproduced in Tab 12).
N Observation: The depreciation rules for real property are generally less favorable than for personal property. Therefore, when a
building is purchased, built or renovated, it is important to identify
any personal property qualifying for more favorable depreciation
included in the cost. See Finding Personal Property Included in a
Building’s Cost (Cost Segregation) on Page 7-11.
Residential Rental Property
Residential rental property (assigned a 27.5 year recovery period)
is a building or structure where at least 80% of the gross rents
are from a dwelling unit, which includes houses, apartments and
mobile homes, but not units in a hotel, motel or other establishment
where more than 50% of the units are used on a transient basis.
IRS Ruling: A mixed-use development, consisting of residential rental apartments and hotel rooms, was treated as a single building for the 80% test for
determining whether the property is residential real property. The projects were
on a single tract of land, operated as an integrated unit (as evidenced by the
actual operation, management, financing and accounting for the buildings)
and were contained in one building. (Ltr. Rul. 201243003)
Open-Air Parking Structures
Open-air parking structures have been classified by some taxpayers as land improvements and depreciated over 15 years. However,
the IRS clarified in a Coordinated Issue Paper (CIP) that they fall
under the definition of buildings in Regulation Section 1.48-1(e)
and, as such, are nonresidential real property with a recovery
period of 39 years. (LMSB4-0709-029)
Description of property. Open-air parking structures are typically
multi-level parking structures accessed by a ramp system. They
have at least two sides that are a minimum 50% open to the outside
because they were designed to eliminate the need for heating and
ventilation systems. Drivers and passengers are protected to some
degree from rain, ice and wind.
These parking structures typically have the following features:
•Hydraulic elevators.
•Internal stairwells.
•Interior lighting.
•Fire sprinklers.
•Signage to facilitate safe and speedy evacuations
during an emergency.
•A separate area or room for electric metering and switching.
U Caution: The CIP concludes that, given the lack of support for
a position of depreciating open-air parking structures over 15 years,
taxpayers may be assessed an accuracy-related penalty under
Section 6662. While the CIP is unofficial IRS guidance, it does
indicate that the IRS is likely to assess such a penalty. Thus, tax
professionals may want to consider filing a change in accounting
method for taxpayers who are depreciating these structures over
15 years. See Tab 10 for coverage of accounting method changes.
 Note: All CIPs were de-coordinated by the IRS in January
2014. Tax professionals should be alert for future guidance replacing these CIPs. To the extent that the CIP included guidance or
tools relevant to addressing an issue or transaction, such guidance
Roads
Energy Efficient Commercial
Building Deduction
Generally, the cost of building a road includes
the cost of preparing the land and the cost of the
road surface. The initial cost of surfacing a road
is generally depreciable. See Road Building Costs
below for analysis of specific costs.
Other Construction Costs
Impact fees. Impact fees (one-time charges to finance specific offsite capital improvements for general
public use) paid by developers should be capitalized and added
to the cost of newly constructed buildings, rather than considered
a cost of the nondepreciable land. (Rev. Rul. 2002-9)
Density variances. The cost of so-called density variances allowing development of larger buildings than would have otherwise
been permitted is added to the basis of the depreciable buildings
(Maguire/Thomas Partners Fifth & Grand, Ltd., TC Memo 200534). The variances have a determinable useful life that is equal to
the depreciable lives of the buildings because they would expire if
the buildings were ever replaced. In other words, a new variance
would have to be obtained if the original buildings were replaced.
Land and environmental surveys. These
studies generally cover the entire property being developed, not just where the buildings and
improvements will be placed. Surveys that help
define the property (for example, boundary or
mortgage surveys) are related to the land itself
and are not depreciable.
Other surveys such as percolation tests and contamination studies
are used to determine if a structure can properly be built on the site.
•If the survey will not necessarily need to be redone when the
depreciable improvement is replaced, the cost of the survey is
associated with the land and, therefore, is not depreciable.
•A survey that must be redone when the depreciable improvement
is replaced is added to the basis of the improvement.
Exception: The existence of an ordinance requiring that the survey
be redone does not mean that the improvement’s replacement
requires the survey to be replaced. (Ltr. Rul. 200043016)
 Expired Provision Alert: Taxpayers that own or lease commercial buildings may deduct, rather than capitalize and depreciate,
all or part of the cost of qualifying energy efficient commercial building
property (IRC §179D). The deduction is allowed for both new and
existing buildings but only for qualifying property placed in service
after 2005 and before 2014. Although the deduction for the cost of
energy efficient commercial building property has expired for property
placed in service after 2013, this discussion is included in the event
the deduction is extended to 2014.
2015
Qualifying Property
Energy efficient commercial building property is depreciable
property that is:
•Installed on or in a building located in the U.S. that is not a (1)
single-family house, (2) multi-family structure of three stories or
fewer above grade, (3) mobile home or (4) manufactured house.
•Part of the (1) interior lighting system, (2) heating, cooling, ventilation and hot water systems or (3) building envelope. Building
envelope includes insulation materials primarily designed to
reduce heat loss or gain, exterior windows, skylights, exterior
doors and some metal roofs. [IRC §25C(c)(2)]
•Certified that it will reduce or is part of a plan to reduce the overall
energy costs of these systems by 50% or more.
Certification
Before claiming the deduction, the property must be certified as
meeting the requirements by an unrelated, qualified and licensed
engineer or contractor. Taxpayers must retain the certification in
their tax records.
Deduction Amount
The maximum allowable deduction for any building is $1.80 per building square footage. This is an aggregate limit over all tax years so
once it is reached, no further deductions for that building are allowed.
Road Building Costs
Type of Cost
Treatment
Authority
Excavating, grading and removing soil to
prepare a roadbed—road is intended to be
permanent.
Generally added to the basis of nondepreciable land.
FSA 200021013
prepare a roadbed—road is temporary.
If the road is temporary (will be used only for a determinable length of time), costs can
be depreciated. Whether a road is temporary depends on the original intent, not on the
road’s physical condition. In the ruling, road built by loggers to harvest a specific tract of
trees was temporary. Once the harvest was complete, road would be abandoned.
Rev. Rul. 88-99
prepare a roadbed—road closely associated
with a depreciable asset.
If a road is so closely tied to a depreciable asset that the road will be retired, abandoned
or replaced contemporaneously with that asset, costs are depreciable. In the ruling, the
roads were between buildings in an industrial complex.
Rev. Rul. 68-193, clarifying
Rev. Rul. 65-265
Initial costs of surfacing the road (for example,
applying gravel or paving).
Depreciable, regardless of whether the road is temporary or permanent, since the surface Rev. Rul. 88-99
is subject to wear and tear (has an expected useful life).
Costs of resurfacing the road.
Generally, expensed as repairs—see Tab 1.
Toledo Home Federal Savings
and Loan Ass’n., 9 AFTR 2d
1109 (DC OH 1962); W.K.
Coors, 60 TC 368 (1973)
Building bridges and culverts.
Depreciable, regardless of whether the road is temporary or permanent.
Rev. Rul. 88-99
2013
2014
Example: Jack operates his sole proprietorship in a small office building he
owns. Jack places in service $3,000 of qualified energy saving property in
2012 and $6,000 in 2013. The building has 3,000 square feet.
Jack’s total deduction for the expenditures is limited to $5,400 (3,000 square
feet × $1.80). Therefore, he deducts the full $3,000 spent in 2012 and $2,400
($5,400 – $3,000) spent in 2013. The remaining 2013 costs of $3,600 ($6,000 –
$2,400) must be capitalized and depreciated.
2014
2013
Partially qualifying property. Property that would otherwise
qualify, except that it does not meet the 50% energy reduction
test, is still eligible for a reduced deduction, limited to 60¢ times
the building square footage. [IRC §179D(d)]
N Observation: The partial deduction is allowed for
any energy-saving property installed in an eligible
building system (interior lighting; heating, cooling, ventilation and hot water; or building envelope) if it meets the
energy-saving target prescribed for that particular system,
even if the overall 50% cost reduction is not achieved
with regard to the building. See Notices 2006-52, 200840 and 2012-26 for the system-specific requirements for partially
qualifying property.
Reporting. C corporations, S corporations and partnerships claim
the deduction on the “Other deductions” line of their respective
returns. Presumably, individuals report the deduction on the “Other
expenses” line of Schedule C, E or F.
Basis reduction. If a deduction is allowed, the basis of the property
is reduced by the amount of the deduction.
Recapture. The energy efficient commercial building deduction
is subject to Section 1245 ordinary income recapture when the
building or property is sold [IRC §1245(a)(2)(C)]. Thus, when the
building is sold, gain to the extent of the deduction is taxed as
ordinary income.
Public buildings. When qualified property is installed on or in
property owned by a federal, state or local government, the related
energy efficient commercial building deduction is allocated to the
person primarily responsible for designing the property instead
of the actual building owner (the tax-exempt governmental unit).
Public buildings include those owned by public schools. See Notice
2008-40 for how this rule works.
Builders of Energy Efficient
New Homes Credit
 Expired
Provision Alert: The credit for builders of energy
efficient new homes has expired for homes acquired after 2013.
The following discussion is included in the event the credit is
extended to 2014.
Contractors (including producers of manufactured
homes) that build new energy efficient homes in the U.S.
are eligible for a credit of $2,000 per dwelling unit (IRC
§45L). The credit is reported on Form 8908, Energy
Efficient Home Credit. Partnerships and S corporations
transfer the amount to Schedule K. All others carry it to
Form 3800, General Business Credit.
•To qualify, the dwelling unit must be certified to have
annual energy consumption for heating and cooling that
is at least 50% less than comparable units and meet certain other
requirements.
•The credit can also apply to a substantial reconstruction and
rehabilitation of an existing dwelling unit.
•A manufactured home that meets a 30% reduced energy consumption standard can generate a $1,000 credit.
•These credits only apply to homes sold by contractors for use
as personal residences.
•The contractor’s tax basis in the home is reduced by the amount
of the credit.
•Construction must be substantially completed after August 8,
2005, and the home must be purchased after 2005 and before
2014.
2015
Certification. The IRS issued guidance on the certification process
that builders must complete to qualify for the credit. The notices
also provide a public list of software programs that may be used
in calculating energy consumption for obtaining a certification. See
Notice 2008-35 for standard homes rules. Notice 2008-36 covers
manufactured homes.
Nonbusiness Energy
Property Credit
 Expired Provision Alert: The nonbusiness energy property
credit has expired for property placed in service after 2013. The
following discussion is included in the event the credit is extended
to 2014.
Taxpayers are allowed a nonrefundable credit equal to the sum
of (1) 10% of the cost of qualified energy efficiency improvements
and (2) the amount of residential energy property expenditures (up
to certain limits). The credit is limited to $500 per taxpayer. This
is a lifetime limit. The property must be new property, and it must
be installed in or on the taxpayer’s principal residence (including
a manufactured home) in the U.S. The credit applies to property
placed in service in 2006, 2007 and 2009–2013. 2014
Qualified Energy Efficiency Improvements
These improvements are building envelope components, such
as: [IRC §25C(c)(2)]
1) Insulation materials or systems designed to reduce the heat
loss or gain of a dwelling unit;
2) Exterior doors and windows (including skylights); and
3) Metal or asphalt roofs installed on a dwelling unit (including
manufactured homes), but only if they are designed to reduce
the heat gain of such dwelling unit.
Residential Energy Property Expenditures
Expenditures must be for the following types of property (including
labor costs for onsite preparation, assembly or original installation
of the property): [IRC §25C(d)(2); Ltr. Rul. 201130003]
1) Energy efficient building property (such as certain electric heat
pumps, water heaters, biomass fuel stoves and central air
conditioners);
2) A qualified natural gas, propane or oil furnace or hot water
boiler; or
3) An advanced main air circulating fan.
Certification Requirements
Taxpayers must receive a proper certification from the manufacturer for property on which they plan to take the credit. Notices
2009-53 and 2013-70 provide that taxpayers may rely on the
manufacturer’s certification to claim the credit, except as specified therein.
Allocation of Costs
Costs eligible for the nonbusiness energy property credit (IRC
§25C) and the Residential Energy Efficient Property Credit discussed on Page 7-9 (IRC §25D) can be allocated according to
the manufacturer’s certification that a portion of the property is
qualified energy property. Additionally, the IRS has agreed that
labor costs related to the installation of the property can be similarly
apportioned. (Ltr. Rul. 201130003)
Residential Energy Efficient
Property Credit
Individuals can claim a tax credit for residential energy efficient
property placed in service in 2006–2016. (IRC §25D; Notice
2013-70)
Residential Energy Efficient Property Credit—2014
Property Type
Solar Water Heating
Solar Electric
Fuel Cells
Small Wind Energy
Geothermal Heat
Pump
Credit Amount
30% of cost (in tax years beginning before 2009, the
credit was capped at $2,000)
30% of cost; max credit = $1,000 per kW of capacity
•The credit (other than for fuel cells) is available for equipment
for the taxpayer’s personal residence, which must be in the U.S.
The credit for fuel cell property is only available for a principal
residence.
•No credit is allowed for equipment used to heat swimming pools
or hot tubs.
• The cost includes labor costs properly allocable to the onsite
preparation, assembly or original installation of the property and
for piping or wiring to interconnect such property to the home.
•The taxpayer’s basis in the credit property is reduced by the
amount of the credit.
•The credit can offset both regular tax and AMT. Any unused credit
can be carried forward to the next year. [IRC §25D(c)(2)]
•Taxpayers can rely on manufacturer’s statements and certifications that property qualifies for the credit. (Notices 2009-41 and
2013-70)
•Credit is available for new construction as well as improvements
to existing homes.
Leasehold Improvements
Who Claims the Deduction?
A landlord (lessor) generally can depreciate property
leased to a tenant (lessee) as well as any improvements that the landlord makes to the property during
the lease term [Reg. §1.167(a)-4]. Exception: No depreciation can be claimed if the lease is treated as a
capital lease for tax. In that case, the tenant is treated
as the owner for tax purposes and claims the depreciation deductions. If the tenant is only obligated to repair
and maintain the property, the lease is generally not a
capital lease and the landlord can still claim depreciation
on the property. See Lease vs. Purchase on Page 1-3 for details.
Depreciating Leasehold Improvements
Capitalized improvements made during the lease generally must
be depreciated over the improvement’s recovery period, not over
the remaining term of the lease [IRC §168(i)(8)]. It doesn’t matter whether the landlord (lessor) or tenant (lessee) makes the
improvements.
Leasehold improvements that are structural components of the building generally have a 27.5-year
or 39-year recovery period. See Qualified Leasehold
Improvements below and Qualified Restaurant Property
and Qualified Retail Improvement Property on Page 7-10
for exceptions. Also, some improvements (such as carpeting or moveable partitions) have a shorter recovery period
because they are considered tangible personal property
rather than structural components of the building. See Can the
Asset Be Moved? on Page 7-13.
Tenant improvements. Generally, improvements made by a tenant/lessee are capitalized and depreciated by the tenant over the
improvement’s MACRS recovery period [IRC §168(i)(8)]. However,
if the lease agreement provides that the cost of improvements
made by a tenant is credited against rent payments due, the tenant
deducts the cost of improvements made to the owner’s property
as rent expense. [Brown, 47 AFTR 244 (7th Cir. 1955)]
What Happens at the End of the Lease?
If improvements made by the tenant are left behind at the end of
the lease, the tenant takes an abandonment loss. The amount
equals the adjusted basis of the improvements. The abandoned
improvements generally become the landlord’s property. However,
the landlord generally is not required to include the value of the
improvements in income. (IRC §109)
Example #1: Walter leases a commercial building from Taylor Properties, Inc.
(TPI). The lease is for five years and is non-renewable. On January 1 of the
fourth year of the lease, Walter adds permanent exterior doors and replaces
the building’s windows, spending $10,000. His rent payments are not credited
for the cost of the improvements. He must depreciate the $10,000 of improvements over the building’s recovery period (39 years), even though the lease will
end (and the improvements will become TPI’s property) after two more years.
When the lease terminates, Walter will have taken two years of depreciation
on the leasehold improvements, so his adjusted basis in them will be $9,498
($10,000 – $246 – $256). That amount can be claimed as an abandonment loss
in the year the lease terminates, assuming Walter does not salvage or retain
any of the improvements.
When the landlord makes improvements to leased property, the
remaining basis in the improvements is written off at the end of the
lease term only if the improvements are disposed of or abandoned
at that time [IRC §168(i)(8)]. If the improvements are not abandoned or disposed of, the landlord continues to depreciate them.
Example #2: Walter owns a commercial building that he leased to a veterinarian for five years. Under the lease agreement, Walter had to make certain
improvements to the building to make it suitable for the vet’s practice (for
example, adding covered area with fenced pens, “doggie doors,” etc.). At the
end of the veterinarian’s lease, Walter leases the building to an engineering
firm. The additions made for the veterinarian are unsuitable for the engineering
firm, so Walter removes them. He can take an abandonment loss (equal to his
adjusted basis in the improvements that he removed) that year.
Qualified Leasehold Improvements
 Expired Provision Alert: Before 2014, special rules for Section 179 expensing, 15-year recovery period and special (bonus)
depreciation applied to qualified leasehold improvements. However, these provisions are not available for 2014 unless Congress
enacts legislation that extends them. This section is included in
the event the rules are extended to 2014. If the rules are not extended, property that formerly was classified as qualified leasehold
improvements and placed in service in 2014 is depreciated under
the general MACRS rules—see the Depreciable Real Property
(2014) table on Page 7-1 and Depreciating Leasehold Improvements in the previous column.
Qualified Leasehold Improvements
Depreciation Summary (2013)
Item
Depreciation Method
2014
IRC §
SL
168(b)(3)
Recovery Period
15 yr1
168(e)(3)(E)
Eligible for Special Depreciation?
Yes2
168(k)(2)
Eligible for Section 179 expensing?
Yes3
179(f)
15-year recovery period also applied if placed in service 10/23/04–12/31/12.
Special depreciation also available if placed in service 9/11/01–12/31/04 or
2013
2008–2012.
12/31/13
3
Also eligible if placed in service in a year beginning in 2010–2012. Exception:
Heating and air conditioning units are not eligible. See Qualified Real Property
on Page 5-8 for rules, including a $250,000 annual limit.
Qualified Restaurant Property
 Expired Provision Alert: Before 2014, special rules for Sec-
tion 179 expensing and 15-year recovery period applied to qualified
restaurant property. However, these provisions are not available for
2014 unless Congress enacts legislation that extends them. This
section is included in the event the rules are extended to 2014. If
the rules are not extended, property that formerly was classified
as qualified restaurant property and placed in service in 2014 is
depreciated under the general MACRS rules—see the Depreciable
Real Property (2014) table on Page 7-1.
1
Qualified Restaurant Property
2
Qualified leasehold improvements must meet all of
the following tests: [IRC §168(k)(3)]
1) The improvement is to an interior portion
of a building.
2) The building is nonresidential real property.
3) The improvement is made by the lessee (tenant), sublessee
or the lessor (landlord) pursuant a lease agreement (or a commitment to sign a lease).
4) The improvement is made to space to be occupied exclusively
by the lessee or sublessee.
5) The improvement is placed in service more than three years
after the date the building was first placed in service (by any
person).
Qualified leasehold improvements do not include any expenditure
for enlarging the building, any elevator or escalator, any structural
component benefiting a common area or the internal structural
framework of the building [IRC §168(k)(3)(B)]. Heating, ventilation
and air conditioning units installed on the exterior of a building
or on its roof are not qualified leasehold improvement property
since they are not installed to the interior of the building. (CCA
201310028)
Qualified leasehold improvements made by the landlord generally are not qualified leasehold improvements in the hands of
any subsequent owner of the improvement unless the property
is transferred at the landlord’s death or in certain nonrecognition
transactions, such as a like-kind exchange. [IRC §168(e)(6)]
U Caution: Improvements made under a lease between related persons cannot be qualified leasehold
improvements. Related persons include members
of an affiliated group as well as spouses (including
legally married same-sex spouses), siblings, children, grandchildren, parents and grandparents and
certain controlled entities (for example, shareholder
and corporation, if the shareholder directly or indirectly owns more than 80% of the stock).
See Regulation Section 1.168(k)-1(c) for details on qualified
leasehold improvements. Although that regulation discusses the
50% and 30% special (bonus) depreciation rules that were in effect for property placed in service after September 10, 2001 and
(generally) before 2005, the IRS has announced that taxpayers can
rely on the regulation for computing special (bonus) depreciation
for assets placed in service in 2008. (News Release IR-2008-58)
 Note: Although the IRS has not specifically stated taxpayers
can rely on the regulation for assets placed in service after 2008,
presumably the IRS will treat those assets the same as those
placed in service in 2008.
Item
Depreciation Method
IRC §
SL
Recovery Period
2014
15 yr
168(b)(3)
1
168(e)(3)(E)
No2
168(e)(7)
Yes3
179(f)
15-year recovery period also applied if placed in service 10/23/04–12/31/12.
12/31/13
Unless property also meets the definition of qualified leasehold improvements (Rev.
Proc. 2011-26). Qualified restaurant property placed in service 10/23/04–12/31/04
or in 2008 also qualified for special depreciation.
2013
3
1
2
The definition of qualified restaurant property has been modified
several times. [IRC §168(e)(7)]
Qualified Restaurant Property Defined
Placed in Service
Definition
10/23/04–12/31/07
Any Section 1250 property that is an improvement to a
building if more than 50% of the building’s square footage
is devoted to preparation of, and seating for on-premises
consumption of, prepared meals. The improvement must
be placed in service more than three years after the date
the building was first placed in service.
12/31/14
1/1/08–12/31/08
Same as preceding row, but the three-year rule doesn’t apply.
1/1/09–12/31/13
Same as preceding row, but buildings also qualify (if the
50% of square footage rule is met).
Observation: Improvements to leased property can qualify even if the lease is
between related parties.
æ Practice Tip: Some features of a restaurant (such as drivethrough equipment, decorative lights and specialized electrical
and plumbing hook-ups) are considered Section 1245 property
that is assigned a five-year recovery period (Asset Class 57.0 per
Rev. Proc. 87-56). See What is Cost Segregation? on Page 7-11.
Qualified Retail Improvement Property
 Expired Provision Alert: Before 2014, special rules for Sec-
tion 179 expensing and 15-year recovery period applied to qualified
retail improvement property. However, these provisions are not
available for 2014 unless Congress enacts legislation that extends
them. This section is included in the event the rules are extended to
2014. If the rules are not extended, property that formerly was classified as qualified retail improvement property
and placed in service in 2014 is depreciated
under the general MACRS rules—see the
Depreciable Real Property (2014) table
on Page 7-1 and Depreciating Leasehold
Improvements on Page 7-9.
Qualified Retail Improvements
Item
Depreciation Method
2014
IRC §
SL
168(b)(3)
15 yr1
168(e)(3)(E)
No2
168(e)(8)
Yes
179(f)
Recovery Period
3
2013
15-year recovery period also applied if placed in service in 2009–2012.
Unless property also meets the definition of qualified leasehold improvements.
2013
(Rev. Proc. 2011-26)
3
1
2
Qualified retail improvement property is any improvement to an
interior portion of a building that is nonresidential real property if:
[IRC §168(e)(8)]
1) Such portion is open to the general public and is used in the
retail business of selling tangible personal property to the
general public and
2) Such improvement is placed in service more than
three years after the date the building was first
placed in service.
N Observation: Improvements to leased
property can qualify even if the lease is between
related parties.
However, expenditures attributable to the following
are not qualified retail improvement property:
1) Enlarging the building.
2) Elevators or escalators.
3) Structural components benefitting a common area.
4) The internal structural framework of the building.
æ Practice Tip: Some features of a retail store (such as electronic
article surveillance systems, sound systems, decorative millwork
and electrical and plumbing hook-ups for specialized equipment)
are considered Section 1245 property that is assigned a five-year
recovery period (Asset Class 57.0 per Rev. Proc. 87-56). See What
is Cost Segregation? below.
Qualified retail improvement property retains its character as such
only for its original owner. However, exceptions for transfers due
to the owner’s death, corporate mergers, formation of business
entities where the taxpayer retains significant control, like-kind
exchanges and involuntary conversions apply. [IRC §168(e)(8)]
Finding Personal Property
Included in a Building’s Cost
(Cost Segregation)
What Is Cost Segregation?
When a building used for business or investment is bought, constructed or renovated, it is important to allocate the costs incurred
to the appropriate asset. Often, some
of the cost will be attributable to assets (either personal property or land
improvements) that can be depreciated
using much more favorable rules than the
straight-line method and 27.5-year or 39-year
recovery period assigned to most buildings.
Example: Walter purchases a commercial store building on January 20 for
$200,000. Based on a 39-year life, his first year depreciation deduction is
$4,914 ($200,000 ÷ 39 x 11.5/12).
Variation: Assume that shortly after the building is purchased, Walter determines that $90,000 of his cost is properly allocated to point of sale systems
that should be depreciated over five years. Then, his depreciation deduction
for the first year would be:
39-year property $ 110,000 ÷ 39 × 11.5/12..........
Five-year property $ 90,000 × 20%......................
Total.........................................................................
$ 2,703
18,000
$ 20,703
Properly allocating costs to the five-year property allows Walter to recover
$90,000 of his investment over a five-year recovery period, rather than over 39
years. Even better, Walter could elect to expense $25,000 (2014 Section 179
deduction limit as of this writing) of the $90,000 of equipment (if he had not already
claimed the deduction for other assets). See Tab 5 for more on Section 179.
A cost segregation study is an analysis of the assets constructed,
acquired or renovated to properly allocate costs to the appropriate
assets. Obviously, the intent is to allocate as much cost as possible to shorter-lived Section 1245 (generally tangible, personal)
property.
under Section 179
æ Practice Tip: Taxpayers should be aware that any sales price
allocation agreed to in a contract between the buyer and seller
may prevent them from later changing their allocation based on a
cost segregation study.
Court Case: A corporation acquired a group of business assets. The sales
contract allocated the sales price to various assets. A subsequent cost segregation study divided the asset classified as a “building” into subcomponents,
some of which were assigned a shorter MACRS recovery period than the
39-year period generally assigned to nonresidential real property. However,
the taxpayer was bound by the allocation in the sales contract so the amount
shown as “building” in the sales contract had to be depreciated over 39 years.
[Peco Foods, Inc., 112 AFTR 2d 2013-5137 (11th Cir. 2013)]
N Observation: For
large projects (generally, costs over
$500,000), a firm specializing in cost segregation studies is often
engaged to do the study. These firms usually employ engineers
and other specialists who are capable of identifying and classifying
different types of assets. Taxpayers undertake cost segregation
projects typically when the tax savings associated with the additional depreciation claimed or the acceleration of depreciation
deductions is expected to exceed the cost of the analysis. If,
however, the taxpayer sells a significant portion of the assets for
a gain soon after finishing the cost segregation project, the additional depreciation taken as a result of the study is recaptured.
Therefore, the cost of the study may not be offset by tax savings.
For smaller projects, the tax professional may be able to get
enough information from the client to break out some assets that
are personal property or land improvements. However, when this
approach is used, the IRS may challenge it unless the taxpayer
can show that the remaining costs (those allocated to the building) are reasonable. See IRS View of Cost Segregation Studies
on Page 7-13 for details.
General Steps for Cost Segregation
A three-step allocation process enables taxpayers to assign
as much cost as possible to depreciable property, or property
with recovery periods that are much shorter than the MACRS
39-year and 27.5-year lives normally assigned to buildings. The
three steps are as follows:
1) Making an initial land-to-building cost allocation.
2) Identifying land improvement costs.
3) Analyzing building costs to identify assets that are not part of
the building or a structural component.
Qualified Principal Residence Indebtedness
 Expired Provision Alert: The exclusion for COD income on
qualified principal residence debt expired on December 31, 2013.
Unless Congress extends the provision, it will not be available for
debt forgiven after 2013. This discussion is retained in the event
the provision is extended to 2014.
2015
The exclusion of COD income from taxable gross income is available for qualified principal residence indebtedness discharged
after 2006 and before 2014 [IRC §108(a)(1)(E)]. The exclusion is
limited to $2 million ($1 million for married filing separately) [IRC
§108(h)(2)]. Qualified principal residence indebtedness is debt that
is incurred in the acquisition, construction or substantial improvement of a taxpayer’s principal residence and that is secured by that
residence. The principal residence is the taxpayer’s main home
where the taxpayer lives most of the time; the taxpayer can only
have one main home at any one time. It does not include home
equity loans used for other purposes or vacation home mortgages.
See IRS Publication 4681 for details.
The amount excluded from gross income is applied to reduce (but
not below zero) the basis of the taxpayer’s principal residence.
The exclusion from income for qualified principal residence
indebtedness is reported on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082
Basis Adjustment).
Repossessing Personal Property
Taxpayers who finance the sale of personal property and later
repossess that property generally will have a gain or loss on the
repossession. They may also have a bad debt expense if the gain
was not reported on the installment method.
Lender’s Tax Treatment—
Foreclosure or Repossession of Personal Property
Original Sale Reported
Installment method
not used
Basis
in debt
obligation1
Debt’s full face value (or its FMV
at the time of the original sale if
FMV used to compute gain or
loss in the year of sale) less all
principal payments received.
Gain or loss FMV of the repossessed
property less:
• Basis in the debt obligation and
• Any repossession costs.
If a gain, it is all ordinary income.
If a loss, see Bad debt below.
Bad debt
If FMV of the repossessed
property is less than the sum of
debt basis plus repossession
costs, taxpayer deducts a bad
debt 2
Basis in
FMV at date of repossession.
repossessed
property
Installment method
used
Unpaid balance of debt
multiplied by one minus the
gross profit percentage on the
sale.
FMV of the repossessed
property less:
• Basis in the debt obligation and
• Any repossession costs.
Character (capital or ordinary) of
the gain or loss on repossession
is same as on the original sale.
N/A
FMV at date of repossession.
If only part of the debt is discharged by the repossession, consider only the basis
of the part discharged.
2
Either business or nonbusiness, depending on the property originally sold.
1
The repossession rules apply whether or not title to the property
was ever transferred to the buyer. Also, there is no difference if the
seller repossesses the property or the buyer voluntarily surrenders
it. However, it is not a repossession if the buyer puts the property
up for sale and the seller repurchases it.
For the repossession rules to apply, the repossession must at
least partially discharge (satisfy) the buyer’s installment obligation to the seller. The discharged obligation must be secured by
the repossessed property.
The seller/lender’s gain or loss on the repossession of personal
property is determined by subtracting the basis of the installment obligation (plus any repossession expenses) from the
property’s FMV plus the FMV of any other assets received in
the transaction.
Repossession of Personal Property Worksheet
(Original Sale Reported on Installment Method)
1) FMV of the repossessed property......................................... 1) $ 2) Unpaid balance of the debt obligation................................... 2)
3) Gross profit percentage for the installment sale.................... 3)
%
4) Unrealized profit. Multiply line 2 by line 3.............................. 4) $ 5) Basis in the debt. Subtract line 4 from line 2......................... 5) $ 6) Costs of repossessing the property....................................... 6)
7) Add lines 5 and 6................................................................... 7) $ 8) Gain or loss on repossession. Subtract line 7 from line 1..... 8) $ Example: Courtney sold her violin for $1,500 [$300 down and $100 a month for 12
months (plus interest)]. Her gross profit percentage is 40%. She reported the sale
on the installment method. After the fourth monthly payment, the buyer defaulted
on the note (which had an unpaid balance of $800), and Courtney repossessed
the violin. Its FMV on the date of repossession was $1,400. The legal costs
of repossession were $75. Courtney’s gain on the repossession is as follows:
FMV of repossessed property..........................................................
Unpaid note balance.........................................................................
Gross profit percentage....................................................................
Unrealized profit...............................................................................
Basis in installment note ($800 – $320)...........................................
Repossession costs..........................................................................
Total basis and costs ($480 + $75)...................................................
Gain ($1,400 – $555)........................................................................
$ 1,400
800
×40%
$ 320
$ 480
75
$ 555
$ 845
Foreclosing on Seller-Financed
Real Estate
If a seller finances the sale of real estate and
later forecloses on the real property, special
rules apply if all of the following conditions are
met: (IRC §1038)
1) The seller repossesses the property to protect
his or her security rights in the property.
2) The installment obligation satisfied by the repossession was
received in the original sale.
3) The seller does not pay any additional consideration (including assuming a debt that arose after the sale) to the buyer to
reacquire the property.
Condition 3 above does not have to be met for the special rules
to apply if:
1) The reacquisition and payment of the additional consideration
were provided for in the original contract of sale or
2) The buyer has defaulted, or default is imminent.
U Caution: Special rules may apply if the repossessed property
was the taxpayer’s main home before the sale. See Regulation
Section 1.1038-2 for further information.
Because the apartment building’s SL method is slower than the method that
applied to the farm building, the SL method is used for the exchanged basis in
the apartment building. Also, the apartment building’s longer recovery period
applies. Under the half-year convention, the farm building is treated as disposed of on June 30, 2014 (even though the exchange occurred in January).
Therefore, six months of depreciation is taken on the farm building in 2014.
The exchanged basis in the replacement (apartment) building is considered
placed in service on July 1, 2014. It is depreciated SL over its remaining 22.5year recovery period (27.5-year recovery period less five years allowed for the
farm building). The mid-month convention applies to the apartment building,
so 2014 depreciation expense is computed as follows:
Exchanged basis............................................................................
Divided by remaining recovery period............................................
Annual depreciation........................................................................
Pro-rated using mid-month convention..........................................
2014 depreciation on apartment building.......................................
$ 339,107
22.5
÷
$ 15,071
× 5.5/12
$ 6,908
Depreciating Excess Basis
Generally, a replacement property’s excess basis (if any) is treated
as newly acquired property and depreciated using the MACRS
recovery period, depreciation method and convention allowed for
that asset [Reg. §1.168(i)-6(d)]. It is treated as placed in service
in the later of the: [Reg. §1.168(i)-6(b)(4)]
•Tax year in which replacement property is placed in service or
•Tax year in which relinquished property is disposed of.
Example: GreatCo placed a retail building in service in 1999. On January 16,
2014, GreatCo exchanges the retail building plus $2 million cash for an office
building in a like-kind exchange. After considering year-of-exchange depreciation, the relinquished retail building has an adjusted basis of $1.5 million. This
becomes the exchanged basis amount for the replacement office building. After
the exchange, the total depreciable basis of the replacement office building is
$3.5 million, which consists of $1.5 million of exchanged basis plus $2 million
of excess basis (that is, cash paid).
The replacement office building’s $1.5 million exchanged basis amount is
depreciated according to the rules explained earlier for exchanged basis.
The replacement office building’s $2 million excess basis amount is treated
as newly acquired property placed in service on January 16, 2014. GreatCo
depreciates this $2 million amount over 39 years, using the straight-line method
and mid-month convention.
Special (Bonus) Depreciation Allowance
Both the exchanged basis of the original qualified property and the
excess basis (if any) of the acquired qualified property qualify for
special (bonus) depreciation if the replacement property qualifies.
[Reg. §1.168(k)-1(f)(5)]
U Caution: Special (bonus) depreciation has expired for property
placed in service after 2013 (except for certain long production
period property and aircraft—see Tab 2). The above discussion is
included in the event it is extended to 2014.
Section 179 Expense
Only the excess basis amount (generally, the amount of boot given)
qualifies for a Section 179 deduction (assuming it meets all the
other requirements—see Tab 5). Section 179 expense cannot be
taken on the exchanged basis in the replacement property. [Reg.
§1.168(i)-6(g)]
Depreciation During Exchange Period
A taxpayer who disposes of relinquished property before acquiring
replacement property cannot depreciate the relinquished property’s
exchanged basis between the time the relinquished property is
disposed of and the time the replacement property is acquired.
During this time, the recovery period for the replacement property’s
exchanged basis amount is suspended.
Electing New Asset Treatment
Taxpayers can elect to treat the entire basis (that is, exchanged
basis plus excess basis) of replacement property as a new MACRS
property asset placed in service on the date of exchange.
Electing New Asset Treatment for Replacement Property
Reg §1.168(i)-6(i)(1)
Issue
Discussion
Relinquished property
Year-of-disposition depreciation on the relinquished
property basis must be calculated and deducted.
Replacement property The entire basis of the replacement property (both
the exchanged basis and the excess basis, if any) is
depreciated as the cost of newly acquired MACRS
property that is placed in service at the time of
replacement.
Special (bonus)
depreciation
If the asset is eligible, the entire basis in the
replacement property qualifies for special (bonus)
depreciation.
Section 179 expense
Section 179 expense is available only for any excess
basis in the replacement property.
Deferred exchanges
The depreciation deduction timing rules apply. (See
Depreciation During Exchange Period in the previous
column.)
Example: RobinCo placed Building R (a retail building)
in service in January 2006. In January 2014, RobinCo
exchanges Building R for Tower S (a radio transmitting
tower) in a like-kind exchange. Since replacement Tower
S has a shorter recovery period (15 years) than relinquished Building R (39 years), Tower S’s exchanged
basis amount must be depreciated over Building
R’s longer remaining recovery period (31 years) under the general rules.
Also, since replacement Tower S’s depreciation method (150% declining
balance) is faster than the method for relinquished Building R (straight-line),
Tower S’s exchanged basis must be depreciated using straight-line (the
slower method).
However, RobinCo could elect out of the general rule and treat Tower S as
newly acquired property placed in service in January 2014. RobinCo could
then depreciate Tower S’s exchanged basis over 15 years using the 150%
declining balance method. Electing out of the general rules would be beneficial
in this case.
Making the election. The election is made on a per property basis
in accordance with the Form 4562 instructions [Reg. §1.168(i)-6(j)].
The election must be made by the due date (including extensions)
of the return for the year of replacement.
æ Practice Tip: According to the Form 4562 instructions, a
statement indicating “Election made under Section 1.168(i)-6(i)”
for each property involved in the exchange must be attached to
the return. The election must be made separately by each person
acquiring replacement property (for example, by the partnership,
S corporation or the common parent of a consolidated group).
Once made, the election cannot be revoked without IRS consent.
Depreciation recapture taint. If the taxpayer elects out of the general rule, the exchanged basis and excess basis are often shown
as one new asset on the depreciation schedule. The cost and accumulated depreciation of the relinquished property are often not
reflected. However, upon eventual disposition of the replacement
property, Section 1245 or 1250 depreciation recapture is measured
based on the property’s recomputed basis, including
Example: LynnCo. purchased a $100,000 printer in 2012. It is depreciated over
a seven-year recovery period. In 2014, LynnCo. sells the printer for $60,000.
In 2015, LynnCo.’s 2014 return is audited and the IRS changes the recovery
period on the printer from seven to five years. The actual and allowable depreciation and the effect of the IRS change to the recovery period are as follows:
As Reported
Per IRS
Sales proceeds.............................................. $ 60,000
$ 60,000
Cost....................................... $ 100,000
$100,000
Accum. deprec....................... < 47,530 >
< 61,600 >
Adjusted basis............................................... < 52,470>
< 38,400>
Gain............................................................... $ 7,530
$ 21,600
The IRS proposes to increase 2014 income by $14,070 ($21,600 – $7,530) to
adjust the gain reported on the printer because, regardless of the depreciation
claimed, the printer’s basis is reduced by allowable depreciation to $38,400.
LynnCo. can request an accounting method change for the printer on Form
3115 filed with an amended return for 2014 (the year of sale). The result of the
method change will be a negative Section 481 adjustment equal to $14,070
($61,600 – $47,530). This is reported on the amended 2014 return, which also
reports a positive adjustment to the gain that year.
Changing Special
(Bonus) Depreciation
 Expired Provision Alert: For qualified assets placed in service
before 2014, special depreciation was available. With the exception of Long Production Period Property and Aircraft on Page 2-13,
special depreciation is not available for property placed in service
after 2013 unless legislation is enacted to extend it.
When an asset qualifies for special depreciation, but the taxpayer
fails to claim it or claims the wrong percentage, a change to the
correct percentage is an accounting method change. When a
taxpayer claims special depreciation on a nonqualified asset, the
change to remove it is an accounting method change.
However, changing to or from claiming special depreciation is not
an accounting method change if the taxpayer is trying to make a
late election out of special depreciation or to apply the 30% rate
instead of the 50% rate, or to revoke such an election [Reg. §1.4461(e)(2)]. Requests to make or revoke an election on an untimely
basis must be made under Regulation Section 301.9100-3, which
requires the taxpayer to request a private letter ruling. See Special
(Bonus) Depreciation on Page 2-12.
For these rules, special depreciation includes several provisions,
as listed in the Special (Bonus) Depreciation Summary table below.
Special (Bonus) Depreciation Summary
Description
All taxpayers—50% (or 100%)
All taxpayers—30%
All taxpayers—50%
NY Liberty Zone—30%
Gulf Opportunity Zone—50%
Kansas Disaster Area—50%
Code §
168(k)
168(k)2
168(k)2
1400L
1400N
1400N
Applies to qualified property
placed in service:
2014
During 2008–20131
After 9/10/01 and before 5/6/03
After 5/5/03 and before 1/1/053,4
After 8/27/05 and before 1/1/086,7
After 12/31/07 for disasters occurring
Other Disaster Areas—50%
168(n)
before 2010 (see Qualified Disaster
Assistance Property on Page 2-13)
2015
1
During 2008−2014, for certain long-production property. [IRC §168(k)(2)(B)]
2
As in effect before amendment in 2008–2010.
3
Before 1/1/06 for certain long-production property (before 1/1/07 if long-production
property affected by Hurricanes Katrina, Rita or Wilma). [IRC §168(k)(2);
Announcement 2006-29]
4
Taxpayers could elect to use 30% rate instead of 50%.
5
Before 1/1/10 for nonresidential real and residential rental property.
6
Before 1/1/09 for nonresidential real and residential rental property.
7
Before 1/1/12 for nonresidential real and residential rental property in certain
counties and parishes that sustained significant damage. [IRC §1400N(d)(6)]
Example: Asta, Inc. (a calendar-year taxpayer) purchased a
$50,000 computer on July 31, 2013. The computer qualified
for 50% special depreciation, which was claimed on Asta’s
2013 tax return filed in March 2014. During November
2015, Asta realizes that it would have been better off had
it not claimed special depreciation on the computer in
2013. Changing from claiming special depreciation to
not claiming it is not an accounting method change because Asta is
effectively trying to make a late election out of the special depreciation.
Therefore, Asta cannot make this change on a Form 3115. Instead, Asta
must request a private letter ruling to make the change.
Accounting Method Changes And
Tangible Property Regulations
For 2014, taxpayers may need to file an accounting method
change to comply with the tangible property regulations published
on September 13, 2013 (TD 9636). (See Tangible Property Regulations beginning on Page 1-4 for discussion of the regulations.)
Automatic consent procedures are provided for amounts paid to
acquire, produce or improve tangible property. Procedures are also
provided for obtaining automatic consent to change to a reasonable
method for self-constructed assets and to change to a permissible
method for certain costs related to real property acquired through a
foreclosure or similar transaction (Rev. Proc. 2014-16). Automatic
consent procedures for changes in accounting for dispositions of
tangible property, a late partial disposition election and a revocation of a general asset account election are also available. (Rev.
Procs. 2014-17 and 2014-54)
Errors Corrected on an
Amended Return
Depreciation changes that are not accounting method changes are
made on an amended return for the year being changed. Thus,
these changes can be made only within the statute of limitations
for the year being changed.
Depreciation Changes Made on an Amended Return
Change
Mathematical, calculation or posting
errors. [Reg §1.446-1(e)]
Changing a depreciation method that
has only been used on one return.1
Adjustment in the useful life of an
asset that is not a MACRS asset,
as long as it is not a change to or
from a useful life that is specifically
assigned by the Code [for example,
the 36-month life assigned to
depreciable computer software by
Code Section 167(f)(1)].
A change in an asset’s placed-inservice date.
Example
A number is transposed when the
preparer enters it on the tax return.
In 2013, taxpayer claims depreciation on a
piece of equipment based on a seven-year
recovery period, but the actual recovery
period is five years. If the 2014 return has
not been filed, an amended 2013 return
can be filed to correct the error.
A change in the useful life of an
amortizable copyright asset that is not a
Section 197 intangible.
An asset was ordered and paid for in
2013, but was not delivered and placed
in service until 2014. Any depreciation
claimed in 2013 would be erroneous and
can be corrected by filing an amended
return.2
In this situation, the taxpayer can also choose to file a Form 3115 to request an
accounting method change. See Method Used for Only One Year on Page 10-2.
2
If the taxpayer initiates the change, the placed-in-service date can be corrected by
adjustments in the current and following tax years, rather than by filing amended
returns. [Reg. §1.446-1(e)(2)(ii)(d)(5)(v)]
1
the intangibles acquired in the transaction are disposed of (including being abandoned or becoming worthless). [IRC §197(f)(1)(A)]
Any unrecognized loss is added proportionately to the adjusted
basis of the remaining Section 197 intangibles and is considered
for future amortization deductions and when determining the gain
recognized on a subsequent disposition of any of the intangibles.
[Reg. §1.197-2(g)(1)]
The amount to add to the basis of each remaining intangible asset is:
Unrecognized
Loss
×
Adjusted Basis of
Remaining Intangible
Adjusted Basis of
All Remaining Intangibles
Basis Increase to
= Remaining Section
197 Intangible
Example: On November 1, 2012, Tim acquired substantially all the assets of
a retailer/manufacturer for $750,000. After allocating the purchase price to the
tangible assets based on their FMVs, the remaining amount was allocated to the
following Section 197 intangibles: $100,000 to a patent, $90,000 to a trademark
and $50,000 to goodwill. On July 1, 2014, Tim sold the trademark for $65,000.
Selling price...................................................................................... $65,000
Cost basis.................................................................... $ 90,000
Accumulated amortization ($90,000 ÷ 180 × 20)........ < 10,000>
Adjusted basis.................................................................................. < 80,000>
Loss on sale..................................................................................... <$15,000>
The $15,000 loss cannot be recognized in 2014, but instead is added to the
basis of the remaining intangibles as follows:
Patent
Cost basis............................................ $100,000
Accumulated amortization
(Cost ÷ 180 × 20)............................... < 11,111>
Adjusted basis..................................... $ 88,889
Additional basis
(88,889 ÷ 133,333) × 15,000............... $ 10,000
(44,444 ÷ 133,333) × 15,000..........................................
Goodwill
$50,000
Total
$150,000
< 5,556> < 16,667>
$44,444
$133,333
$ 5,000
The additions to basis should then be amortized over the remaining months
of the original intangible assets’ 180-month amortization period.
Noncompete agreements. A noncompete agreement that is a
Section 197 intangible cannot be treated as disposed of or worthless before the entire (related) business interest is disposed of [IRC
§197(f)(1)(B)]. This means that amortization must continue over 15
years even if the agreement becomes worthless or is abandoned.
Acquirer’s basis and useful life in a nontaxable transfer. The
acquirer of a Section 197 intangible in a nonrecognition transaction
amortizes the portion of the asset that corresponds to the transferor’s adjusted basis over the remaining useful life of the asset in
the hands of the transferor. The remaining purchase price of the
asset is amortized over a new 15-year period.
Disposing of Multiple Section 197 Intangibles
A taxpayer disposing of more than one amortizable Section 197
intangible in a transaction or a series of related transactions must
treat all of the intangibles as one item of Section 1245 property for
depreciation recapture [IRC §1245(b)(8)]. This prevents taxpayers
from allocating sales proceeds to intangibles that would generate
capital gain income rather than ordinary recapture income upon sale.
Exception: This rule does not apply to any Section 197 intangible
whose basis exceeds its FMV.
Example: Charlie acquired two Section 197 intangible assets on January 1,
2009 for $60,000. Asset A cost $20,000 and Asset B cost $40,000. On January
1, 2014, Charlie sells the two assets for $60,000. He has claimed $4,000 of
amortization per year ($60,000 total cost ÷ 15 years), so his adjusted basis in
the two intangibles is $40,000 ($60,000 cost less $20,000 amortization) and
his gain is $20,000 ($60,000 sales proceeds less $40,000 adjusted basis).
For recapture, Charlie must treat the sale of the two assets as the sale of a
single asset, so his entire gain is characterized as ordinary recapture income.
Computer Software
Computer software includes all programs designed to cause a
computer to perform a desired function. It also includes any database or similar item that is in the public domain and is incidental
to the operation of qualifying software.
Computer software acquired in connection with the acquisition
of a trade or business is a Section 197 asset only if it is: [Reg.
§1.197-2(c)(4)]
•Unavailable to the general public,
•Substantially modified (that is, cost of modifications >25% of the
price of unmodified software, but at least $2,000) or
•Subject to an exclusive license.
Software that doesn’t meet these tests and any software that is not acquired in connection with
the acquisition of a trade or business (or
substantial part thereof) are not Section
197 intangibles. See Software That Is Not
a Section 197 Intangible below.
Software That Is Not a Section 197 Intangible
Rev. Proc. 2000-50
Asset
Cost Recovery
Software acquired as part of the
Depreciated with the associated computer
cost of hardware—software’s cost is hardware under MACRS over a five‑year
not separately stated.
life. Expensed as Section 179 property, if
eligible.
Software is purchased separately
Depreciated straight-line over 36 months
or its cost is separately stated from starting with the month placed in service.
any related hardware purchase.
Note: May be eligible for Section 179
(Off-the-shelf software that is readily expensing if placed in service in a tax year
available for sale to the public.)
beginning after 2002 and before 2014,
and for special (bonus) depreciation if
placed in service after 2007 and before
2014.
Software that is leased or licensed. Expensed currently (as rental expense).
Software developed internally as a Expensed or, at the taxpayer’s election,
result of research or experimental
capitalized and amortized over 36 or 60
expenditures.
months.
Software with a useful life of less
Expensed currently.
than one year.
IRS Ruling: A taxpayer purchased software and hired consultants to customize it (integrating different software modules such as financial accounting,
inventory control, sales, etc.) before using it for its intended purposes. The
IRS ruled that (1) the software’s cost is capitalized and amortized ratably over
36 months under Code Section 167(f) because the software was acquired in a
transaction involving the acquisition of a trade or business and therefore not
subject to Code Section 197 and (2) the treatment of the costs of adapting
and customizing software depends on the nature of the work performed and
who is responsible for developing the new software. In the ruling, the taxpayer
employed consultants, but in the end, was solely responsible for the creation
and performance of the software project. So the taxpayer’s costs of writing
readable software code were deductible as self-developed software under
Rev. Proc. 2000-50. (PLR 200236028)
Safe Harbor For Creative
Property Costs
Taxpayers engaged in the trade or business of film production may
be able to amortize the creative property costs for properties not set
for production within three years of the first capitalized transaction.
Creative property costs include costs paid or incurred to acquire
and develop screenplays, scripts, story outlines, motion picture
production rights to books and plays, and other similar properties
2015
U Caution: Qualified timber property does not include property
on which shelter belts or ornamental trees (for example, Christmas
trees) are planted.
Recapture
For qualified timber property disposed of within 10 years after
incurring qualifying reforestation expenses, report any gain as
ordinary income up to the amount expensed or amortized. [IRC
§1245(a)(3) and IRC §1245(b)(7)]
Research and Experimental
Expenditures
What Costs Are Included?
Research and experimental (R&E) expenditures are costs incurred
in a trade or business for activities intended to provide information that would eliminate uncertainty about the development or
improvement of a product (Reg. §1.174-2). For this purpose, a
product includes any of the following:
•Formula.
•Invention.
•Patent.
•Pilot model.
•Process.
•Technique.
•Property similar to the items listed above.
The term product also includes products used in the taxpayer’s
trade or business or held for sale, lease or license.
Uncertainty exists if the information available does not establish
how to develop or improve a product or the appropriate design
of a product.
2015
U Caution: Although the costs of obtaining a patent, including
attorneys’ fees paid or incurred in making and perfecting a patent
application, are R&E costs, any costs to obtain someone else’s
patent are not.
Costs not included. R&E costs do not include expenses for any
of the following activities:
•Advertising or promotions.
•Consumer surveys.
•Efficiency surveys.
•Management studies.
•Quality control testing.
•Research in connection with literary, historical or similar projects.
•The acquisition of another’s patent, model, production or process.
Deducting the costs. Research and experimental costs are
deducted in one of the following ways:
1) Deduct as a current business expense.
2) Elect to amortize over 60 months.
3) 10-year optional write-off.
See Deducting Research and Experimental Expenditures below
for a discussion of the advantages and disadvantages to each of
the three methods.
Making the elections. To elect the optional write-off method or
amortization of research costs, fill out Part VI of Form 4562 and
attach to either a timely filed return (including extensions) or an
amended return within six months of the original due date of the
return (excluding extensions). If electing the optional write-off
method, a statement must also be included with the taxpayer’s
name and address, taxpayer number and the type of research cost
and specific amount of the research cost for the election.
Claiming the Incremental Research Credit
 Expired Provision Alert: The research credit expired
for
expenses paid or incurred after December 31, 2013. Congress
has retroactively renewed this credit (post-expiration) on multiple
occasions. Tax professionals should monitor developments for
possible renewal of the credit. This discussion is included in the
event the credit is extended to 2014.
Taxpayers may elect to claim a research credit (RC) for R&E costs
rather than expensing them. Not all costs that are R&E costs will
qualify for the RC. See Qualified research expenditures below.
U Caution: If a taxpayer elects to claim the RC for certain costs,
those same costs cannot be expensed or capitalized and amortized. In other words, taxpayers cannot get a double tax benefit
from the same costs.
Qualified research expenditures. The RC can be claimed for
qualified research expenditures (QREs) conducted as part of a
taxpayer’s trade or business and paid or incurred before January 1, 2014. QREs are the sum of in-house research expenses
and contract research expenses. [IRC §41(b)(1) and Reg. §1.41-4]
In-house research expenses are:
1) Wages paid to an employee engaged in qualified research or
in the direct supervision of qualified research.
2) Amounts paid for supplies used to conduct qualified research.
3) Amounts paid for the use of computers to conduct qualified
research.
Contract research expenses are 65% of amounts paid to persons
other than employees for qualified research. The limit is increased
to 75% for payments made to a qualified research consortium,
which is an organization that has the following characteristics:
1) It is a Section 501(c)(3) or 501(c)(6) organization and is exempt
from tax under Code Section 501(a).
2) It is organized and operated primarily to conduct scientific
research.
3) It is not a private foundation.
Payments made to a qualified research consortium are made on
behalf of the taxpayer and one or more unrelated taxpayers.
Deducting Research and Experimental Expenditures
Method
Description
Current Business Research and experimental costs that are ordinary and
Expense
necessary business expenses can be deducted in the current
[IRC §174(a)]
year as Other Business Expenses. The taxpayer must adopt
this method in the first year that such expenditures are paid or
incurred. Occasionally, the taxpayer may adopt this method in a
later year with IRS consent.
Elect to Amortize Amortization period begins with the month an economic benefit
[IRC §174(b)]
from the expenditures is first received. Costs are amortized
ratably over a period of 60 months or more. This is a one-time
election that applies to all expenditures in the year of election and
all subsequent years and can be revoked only with IRS consent.
Optional WriteOff Method
[IRC §59(e)]
Research and experimental costs are deducted, if elected,
ratably over a 10-year period beginning with the tax year the
costs are incurred. The election applies only to current-year
expenditures and is not binding in future years.
Pros and Cons
• Advantages: Immediate deduction and simplicity.
• Disadvantage: Amounts expensed by individuals are subject to 10-year
amortization for AMT, unless taxpayer materially participates in the activity. [IRC
§56(b)(2)]
• Advantages: No AMT adjustment. Sixty-month amortization allows faster
recovery than 10-year write off.
• Disadvantages: Amortization does not begin until economic benefit realized.
Once election is made, it applies to all later years, unless permission to revoke
obtained from IRS.
• Advantages: No AMT adjustment required for costs written off over 10 years. This
is also a flexible method. Taxpayer can choose each year the amount of costs
that will be written off over 10 years (allowing taxpayer to reduce or avoid AMT).
• Disadvantage: May provide for longer write-off in many cases.
What’s New and Glossary
and 2014

Tax Legislation
Tab 13 Topics
Tax Legislation....................................................... Page 13-1
Selected Tax Law Changes Affecting Business
Assets.................................................................. Page 13-1
Glossary................................................................. Page 13-3
The following table identifies selected tax legislation enacted in
2009, 2010, 2011, and 2013 impacting 2014 and later tax returns.
Name of Act
Worker, Homeownership and Business
Assistance Act of 2009
Hiring Incentives to Restore Employment (HIRE) Act
Patient Protection and Affordable Care Act
Health Care and Education Reconciliation Act
of 2010
Small Business Jobs Act of 2010
Tax Relief Act of 2010
Comprehensive 1099 Taxpayer Protection and
Repayment of Exchange Subsidy Overpayments
Act of 2011 (the 1099 Act)
American Taxpayer Relief Act of 2012
Tax Increase Prevention Act of 2014
Public Law Date of EnactNumber
ment
PL 111-92
11/6/09
PL 111-147
PL 111-148
PL 111-152
3/18/10
3/23/10
3/30/10
PL 111-240
PL 111-312
PL 112-9
9/27/10
12/17/10
4/14/11
PL 112-240
PL 113-295
1/2/13
12/19/14
Selected Tax Law Changes Affecting Business Assets
Item
Business Property
Indian Reservation
Property—Shorter
Recovery Periods
2015
Motorsports
Entertainment
Complexes—SevenYear Recovery Period
Qualified Leasehold,
Restaurant and Retail
Improvement Property—
15-Year Recovery
Period
Effective Dates1
Page
Property placed
in service before
2014
Property placed
in service before
2014
2-4
2-3
Applying to 2014 and Previous Tax Years
Provision in Effect for 2013
Provision in Effect for 2014
is
Shortened recovery periods for both regular tax and AMT applied to Expired provision. Qualifying property was
qualified Indian reservation property placed in service before 2014. required to be placed in service before 2014.
2015
is
Motorsports entertainment complexes were depreciated over a Expired provision. Qualifying property was
seven-year recovery period. [IRC §168(e)(3)(C)(ii) and IRC §168(i) required to be placed in service before 2014.
(15)]
2015
are
Qualified leasehold improvements, qualified restaurant property and Expired provision. Qualified leasehold
qualified retail improvements were assigned a 15-year (straight-line) improvements and qualified restaurant
recovery period. [IRC §168(e)(3)(E)]
property were designated 15-year MACRS
property if placed in service after October
22, 2004 and before 2014. Qualified retail
2015
improvements
were designated 15-year
2015
MACRS property if placed in service after
2008 and before 2014. If placed in service
after 2013, all three types of property are
assigned a 39-year (straight-line) recovery
2014
applies
period.
Tax years
5−9
Generally, a Section 179 election can only be revoked with IRS Expired provision. The one-time ability to
Section 179—Election
beginning before
consent. However, the ability to irrevocably revoke a Section 179 revoke a Section 179 election applied to tax
Can Be Revoked
2014
election without IRS consent for any property applied to tax years years beginning after 2002 and before 2014.
beginning after 2002 and before 2014. [IRC §179(c)(2)]
2015
is
2015
Software placed 5−6, Off-the-shelf computer software was eligible for the Section 179 Expired provision. Off-the-shelf computer
Section 179—Expensing
in service in a tax 11−4 election if placed in service in a tax year beginning after 2002 and software was Section 179 property if placed
for Off-the-Shelf
year beginning
before 2014. [IRC §179(d)(1)(A)(ii)]
in service in a tax year beginning after 2002
Software
2015
are $500,000
before 2014
and before 2014. 2015
The Section 179 deduction and qualifying property limits were The limits have fallen to $25,000 and
Section 179—Increased Property placed in 5−1
service in 20132
$500,000 and $2,000,000. [IRC §179(b)]
$200,000 for property placed in service in a
Deduction Limit
$2,000,000
and 20142
tax year beginning after 2013. in 2014
Property placed in 5-6, Taxpayers could claim the Section 179 deduction on up to $250,000 Expired provision. Qualified real property
Section 179—Qualified
service in 20132
7-2 of qualified real property (qualified leasehold improvements, was Section 179 property if placed in service
Real Property
qualified restaurant property and qualified retail improvement in a tax year beginning in 2010 – 2013. 2014
and 20142
is
is
property). [IRC §179(f)]
Property placed
5-2 An enterprise zone business that placed qualified zone property Expired provision. Qualifying property was
Section 179—Qualified
in service before
(defined in Code Section 1397A) in service in an empowerment zone required to be placed in service before 2014.
Zone Property
2014
before 2014 could increase its Section 179 deduction and qualifying
2015
2015
property limits. [IRC §1391(d) and IRC §1397A]
1
Many tax provisions scheduled to expire completely or to revert to former rules have been extended in the past. Tax professionals should monitor legislation to ascertain
the current status of any tax provision.
2
Tax years beginning in such year.
Property placed
in service before
2014
2-1,
2-2,
2-3,
2-7,
2-12,
7-1,
7-9,
7-10
Continued on the next page
Selected Tax Law Changes Affecting Business Assets
Special (Bonus)
Depreciation—
Allowance
2015
2016
Property acquired
and placed in
service before
2014 (before
2015 for certain
property)
Property placed
Special (Bonus)
in service in 2013
Depreciation—
(2014 for certain
Corporate Election to
property)
Accelerate Certain
2015
Credits In Lieu of
Claiming
Tax Credits
Energy Efficient Homes
2015
Incremental Research
Nonbusiness Energy
Property
Plug-in Electric
Vehicles—2- and
3-Wheeled Vehicles
Taxes and Rates
Long-Term Capital
Gains and Qualified
Dividends Rate
Applying to 2014 and Previous Tax Years (Continued)
2-12,
6-7
2-13
2014
Qualified new
7-8
energy efficient
homes acquired
from an eligible
contractor before
2014
Qualified research 11-9
expenditures
incurred before
2014
Qualified property
7-8
placed in service
2015
before 2014
Qualified property 6-12
acquired after 2011
and before 2014
The 50% special depreciation allowance was available for new qualified
property additions. The following allowance rates applied, depending
on when the qualified property was acquired and placed in service:
[IRC §168(k)]
• 2008 – 2010:
–1/1/08–9/8/10: 50%
–9/9/10–12/31/10: 100%
• 2011: 100%
• 2012 and 2013: 50%
For long-production-period property and certain aircraft, the placedin-service dates were extended one year.
Note: For 2008 – 2013, the Section 280F limit on depreciation
for passenger autos was also increased by $8,000 for qualified
property, and no AMT adjustment applies to property for which the
special depreciation allowance is claimed.
The election to forego the special depreciation allowance and instead
increase the limit on certain credits is available for assets placed in
service in 2011, 2012 and 2013 (2011 – 2014 for long-productionperiod property and certain aircraft) [IRC §168(k)(4)(D)]. The election
(available only to corporations) can be made for Round Two or
Round Three property, which is property eligible for the special
depreciation allowance solely because it meets the requirements
under the extension of the special depreciation allowance for certain
property placed in service after 2010 (Round Two) or 2012 (Round
Three). However, corporations that have already made this election
for an earlier year can elect to not apply the election to Round Two
or Round Three property. Also, for Round Two or Round Three
property, the limit on unused research credits cannot be increased
by making this election.
50%
depreciation
is only available
Thespecial
50% special
depreciation
al- for
long-production-period
property
and certain
lowance
is available for
new qualified
aircraft placed
in service in 2014.
property
additions.
For long-production-period property and
certain aircraft, the placed-in-service
dates are extended one year.
Note: For 2014, the Section 280F limit
on depreciation for passenger autos is
also increased by $8,000 for qualified
property, and no AMT adjustment applies
to property for which the special depreciation allowance is claimed.
The election to forego the special depreciation
allowance and increase the limits on certain
credits is only available for long-productionperiod property and certain aircraft placed in
service in 2014.
This election is also available for
long-production-period property and
certain aircraft placed in service in 2015.
A credit was available to eligible contractors who constructed or Expired provision. Eligible contractors were are
manufactured homes that met certain energy efficiency standards. allowed a credit for qualified homes acquired
[IRC §45L(g)]
before 2014 by a person for use as a
residence.
2015
is
A credit was available for the cost of increasing research activities. Expired provision. A credit was available
[IRC §41]
for the cost of increasing research activities
before 2014.
is
2015
2015
The $500 lifetime credit for qualified energy efficiency improvements
and expenditures to a taxpayer’s principal residence was available
for property placed in service in 2013. (IRC §25C)
Taxpayers who purchased a qualified 2- or 3-wheel plug-in electric
vehicle could take a credit of up to $2,500. [IRC §30D(g)]
Expired provision. A credit was available
for property placed in service before 2014.
Expired provision. A credit was available for 2or 3-wheel plug-in electric vehicles purchased
before 2014.
Caution: Taxpayers who purchase a qualified
four-wheeled plug-in electric vehicle after 2009
are eligible for a credit of up to $7,500 (IRC
§30D). See Credits for Plug-In Vehicles on
Page 6-12 for applicable rules and a table of
certified vehicles.
The 15% maximum rate on long-term capital gains and qualified The 15% maximum rate on long-term
dividends applies to the extent taxable income does not exceed capital gains and qualified dividends applies
$400,000 (Single), $425,000 (HOH), $450,000 (MFJ or QW) and to the extent taxable income does not
$225,000 (MFS). When taxable income exceeds those amounts, a exceed $406,750 (Single), $432,200 (HOH),
20% rate applies to long-term capital gains and qualified dividends $457,600 (MFJ or QW) and $228,800
(to the lesser of such gains and dividends or taxable income in (MFS). When taxable income exceeds those
excess of the threshold amount). These rates apply for regular amounts, a 20% rate applies as explained in
the 2013 column.
tax and AMT. [IRC §1(h)]
2013 and later
8-16 Individuals with modified AGI (MAGI) over $200,000 ($250,000 if Same as 2013. Unlike the long-term capital
Net Investment
MFJ or QW; $125,000 if MFS) are subject to a 3.8% additional tax gain and qualified dividend taxable income
Income (NII) Tax
on NII (or if less, on the excess of MAGI over the threshold amount). threshold amounts referenced above, the NII
NII generally includes interest, dividends, royalties, rents, gross tax MAGI threshold amounts are not adjusted
income from a passive trade or business and net gain from property for inflation.
dispositions (other than most property held for use in a nonpassive
trade or business). NII is reduced by deductions allocable to such
income. The tax also applies to estates and trusts. (IRC §1411)
1
Many tax provisions scheduled to expire completely or to revert to former rules have been extended in the past. Tax professionals should monitor legislation to ascertain
the current status of any tax provision.
2
Tax years beginning in such year.
13-2 2013 and later
8-2
2014 Tax Year | Depreciation Quickfinder ® Handbook
Depreciable property: Property that is (1) owned by the taxpayer,
(2) used in a business or investment activity, (3) has a determinable
useful life and (4) expected to last more than one year.
Depreciable real property: Buildings and their structural components,
other inherently permanent structures and certain land improvements.
Depreciation: The annual deduction for the cost of tangible and
intangible business or investment property over a specified number of years.
Disaster assistance property: An increased Section 179 deduction
was available for qualified Section 179 disaster assistance property
placed in service in a federally declared disaster area if the disaster occurred before 2010. The property must be placed in service by the last
day of the third calendar year following the applicable disaster date. A list
of the federally declared disaster areas is available at www.fema.gov.
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.
E
Economic owner: The party who bears the economic
risks and rewards related to the property.
Economic useful life: The economic useful life of a
unit of property is generally the period over which the
property may reasonably be expected to be useful to
the taxpayer in its trade or business or for the production of income.
Electric vehicle: A vehicle that is powered primarily by an electric
motor drawing current from rechargeable batteries, fuel cells or
other portable sources of electrical power.
Employer provided cell phones: When provided primarily for
noncompensatory business reasons, neither the business nor
personal use of the phone results in income to the employee, and
no recordkeeping of usage is required. (Notice 2011-72)
Empowerment zone: An area designated by the Secretaries of
Agriculture and HUD as eligible for certain tax incentives. The
designations generally remained in effect through December 31,
2013 (News Release IR-2013-78). As of the publication of2014
this
Handbook, empowerment zone designations had not been extended to 2014.
Parts of the following urban areas were
listed as 2013 empowerment zones in the
2013 instructions for Form 8844, Empowerment Zone Employment Credit:
Empowerment Zones
Urban Areas
• Pulaski County, AR
• Tucson, AZ
• Fresno, CA
• Los Angeles, CA (city and county)
• Santa Ana, CA
• New Haven, CT
• Jacksonville, FL
• Miami/Dade County, FL
• Chicago, IL
• Gary/Hammond/East Chicago, IN
• Boston, MA
• Baltimore, MD
• Detroit, MI
• Minneapolis, MN
• St. Louis, MO
• East St. Louis, IL
• Cumberland County, NJ
• New York, NY
• Syracuse, NY
• Yonkers, NY
• Cincinnati, OH
• Cleveland, OH
• Columbus, OH
• Oklahoma City, OK
• Philadelphia, PA
• Camden, NJ
• Columbia/Sumter, SC
• Knoxville, TN
• El Paso, TX
• San Antonio, TX
• Norfolk/Portsmouth, VA
• Huntington, WV
• Ironton, OH
• Washington, DC (part of DC)
through 2011
Table continued in the next column
Empowerment Zones (Continued)
Rural Areas
• Desert Communities, CA (part of
• Griggs-Steele, ND (part of Griggs
Riverside County)
County and all of Steele County)
• Southwest Georgia United, GA (part of • Oglala Sioux Tribe, SD (part of
Crisp County and all of Dooly County)
Jackson County and all of Bennett
• Southernmost Illinois Delta, IL (parts of and Shannon Counties)
Alexander and Johnson Counties and • Middle Rio Grande FUTURO
all of Pulaski County)
Communities, TX (parts of Dimmit,
• Kentucky Highlands, KY (part of
Maverick, Uvalde and Zavala
Wayne County and all of Clinton and
Counties)
Jackson Counties)
• Rio Grande Valley, TX (parts of
• Aroostook County, ME (part of
Cameron, Hidalgo, Starr and
Aroostook County)
Willacy Counties)
• Mid-Delta, MS (parts of Bolivar,
Holmes, Humphreys, Leflore,
Sunflower and Washington Counties)
For details, use the EZ/RC Address Locator at http://egis.hud.gov/ezrclocator to
determine whether a location is in an empowerment zone.
Exchange: To barter, swap, part with, give or transfer property for
other property or services.
F
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.
Farm property: Assets used in agriculture, such as machinery
and equipment, grain bins and fences.
Federally declared disaster area: Formerly called a Presidentially declared disaster area, it is the area that is determined by
the President to warrant assistance by the federal government
under the Robert T. Stafford Disaster Relief and Emergency Assistance Act for disasters declared in tax years beginning after
December 31, 2007.
Fiduciary: The one who acts on behalf of another as a guardian,
trustee, executor, administrator, receiver or conservator.
Foreclosure: Lender takes property securing a mortgage in satisfaction of the debt.
Fungible commodity: A commodity of a nature that one part may
be used in place of another part.
G
General asset account (GAA): An elective grouping of depreciable assets that have the following attributes in common:
•Depreciation method,
•Recovery period,
•Convention (for example, half-year convention) and
•Tax year in which they were placed in service.
General depreciation system (GDS): The method of computing
depreciation under the Modified Cost Recovery System (MACRS)
absent any election or requirement to use another method. Under
the general depreciation system, every asset is assigned a recovery period, depreciation method and convention, which are used
to determine the annual depreciation deductions.
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.
O
Operating lease: A lease under which the lessor is the economic
owner. For tax, this is treated as a rental arrangement.
Organizational costs: Costs incurred in the creation of a business entity, governed by Section 248 for corporations and Section
709 for partnerships. Examples include (1) legal services incurred
in drafting corporate documents or a partnership agreement,
(2) accounting services required when organizing the entity, (3)
expenses of temporary directors, (4) organizational meetings of
directors, shareholders and partners and (5) fees paid to the state
of incorporation or organization.
P
Passenger automobiles: For depreciation purposes,
four-wheeled vehicles having an unloaded gross
weight of 6,000 pounds or less (6,000 pounds or
less loaded gross vehicle weight for trucks and
vans) that are manufactured primarily for use on
public roads. Certain vehicles, such as ambulances,
hearses, vehicles used to transport people or goods for
hire and vehicles not likely to be used for personal use
are excepted. Passenger autos are subject to annual
depreciation limits.
Personal property: Property other than real property which is of
either a tangible or intangible nature.
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.
Q
Qualified cellulosic biofuel plant property: Plant property
used solely in the U.S. to produce any liquid fuel produced from
lignocellulosic or hemicellulosic matter (refers to plant matter or
biomass, such as corn stalks) that is available on a renewable or
recurring basis.
Qualified disaster assistance property: Property used in an
active trade or business that is either:
1) MACRS property with a recovery period of 20 years or less,
2) Computer software,
3) Water utility property,
4) Qualified leasehold improvement property,
5) Nonresidential real property or
Qualified disaster expenses: Expenses related to a federally
declared disaster area that are:
1) Connected to a trade or business or to business-related property;
2) For any of the following reasons:
•Abatement or control of hazardous substances that were
released,
•Removal of debris from, or the demolition of structures on,
damaged or destroyed business-related real property or
•Repair of damaged business-related property;
3) Otherwise chargeable to a capital account and
4) Paid or incurred after 2007 for disasters declared after 2007.
Qualified electric vehicle (QEV): A vehicle that is powered
primarily by an electric motor drawing current from rechargeable
batteries, fuel cells or other portable sources of electrical power.
Qualified intermediary: In a like-kind exchange, a person who is
not the taxpayer or a disqualified person who enters into a written
agreement with the taxpayer to facilitate the transaction necessary
to complete a deferred exchange.
Qualified joint interest: A qualified joint interest is any interest
in property held by husband and wife as either of the following:
•Tenants by the entirety.
•Joint tenants with right of survivorship if husband and wife are the only joint tenants.
Qualified leasehold improvement
property: A leasehold improvement that
meets the following four tests:
•The improvement is to an interior portion of a building (not a
common area).
•The building is nonresidential real property.
•The improvement was made pursuant to a lease by the lessee,
sub-lessee or the lessor (landlord) to property to be occupied
exclusively by the lessee or sub-lessee.
•The improvement is placed in service more than three years after
the date the building was first placed in service.
See Qualified Leasehold Improvements on Page 7-9.
Qualified NY Liberty Zone property: Property that is any of the
following if at least 80% of its use is in the taxpayer’s trade or
business in the NY Liberty Zone:
•MACRS property with a recovery period of 20 years or less.
•Property that is an integral part of the gathering, treatment or
commercial distribution of water that, absent the special rules
for NY Liberty Zone property, would be 20-year property.
•Any municipal sewer.
•Computer software that is readily available for purchase by the
general public, is subject to a nonexclusive license and has not
been substantially modified.
•Nonresidential real property and residential rental property to
the extent it rehabilitates or replaces real property damaged or
destroyed as a result of the terrorist attacks of September 11,
2014
2001.
Qualified real property: Certain real property that is eligible for
up to $250,000 of Section 179 expense in 2010-2013. Includes
qualified leasehold improvement property, qualified restaurant
property and qualified retail improvement property.
See Qualified Real Property on Page 5-8.
Qualified restaurant property: Any Section 1250 improvement
to a building if: (1) the improvement is placed in service more than
three years after the date the building was first placed in service,
and (2) more than 50% of the building’s square footage is devoted
to the preparation of, and seating for, on-premises consumption
of prepared meals.
See Qualified Restaurant Property on Page 7-10.
Qualified retail improvement property: An improvement to an
interior portion of a building that is nonresidential real property if:
(1) that portion is open to the general public and is used in the retail
trade or business of selling tangible personal property to the general public and (2) the improvement is placed in service more than
three years after the date the building was first placed in service.
See Qualified Retail Improvement Property on Page 7-10.
R
Real property: Land, improvements and buildings thereon, including attached items and growing things.
Recapture: To include as income an amount allowed or allowable
as a deduction in a prior year.

Depreciation Quickfinder® Handbook

Transcription

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