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Depreciation Quickfinder® Handbook(2015 Tax Year)

Updates for the Protecting Americans From Tax Hikes Act of 2015

Instructions: This packet contains “marked up” changes to the pages in the Deprecia-tion Quickfinder® Handbook that were affected by the Protecting Americans From Tax Hikes Act of 2015, 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.

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2015 Vehicle Quick FactsPassenger Autos—GVW (unloaded) up to 6,000 lbs.

Depreciation limit—Acquisition year (special depreciation applies)1 $ 11,160Depreciation limit—Acquisition year (no special depreciation)1 3,160Second-year limit 5,100Third-year limit 3,050All years thereafter 1,875

Trucks and Vans—GVW (loaded) up to 6,000 lbs.Depreciation limit—Acquisition year (special depreciation applies)1 $ 11,460Depreciation limit—Acquisition year (no special depreciation)1 3,460Second-year limit 5,600Third-year limit 3,350All years thereafter 1,975

Car, Truck or Van (Including SUVs and Minivans) GVW over 6,000 but not over 14,000 lbs.

Depreciation limit N/AMaximum Section 179 deduction $ 25,0003

Standard Mileage RatesBusiness 57.5¢Depreciation component 24¢Charitable 14¢Medical and moving 23¢1 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 2014 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.

Depreciation, Amortization, Sales and Exchanges

2015 Tax YearMACRS Recovery Periods for Assets Placed in Service in 2015

Recovery Period (Years)GDS/AMT ADS

Assets Used in All Business ActivitiesAirplanes (noncommercial) and helicopters 5 6Automobiles 5 5Computers and peripheral equipment 5 5Heavy general purpose trucks (13,000 lbs. or more) 5 6Light general purpose trucks (less than 13,000 lbs.) 5 5Office furniture and equipment 7 10Tractor units (for over-the-road use) 3 4Trailers 5 6Typewriters, calculators, copiers 5 6

Assets Used in Agricultural ActivitiesAgricultural machinery and equipment 7 10Cattle (breeding or dairy) 5 7Farm buildings, other than single purpose 20 25Fences (agricultural) 7 10Horses (breeding or work) 12 years old or less 7 10Horses (breeding or work) over 12 years old 3 10Single-purpose agricultural or horticultural structures 10 15Trees or vines bearing fruits or nuts 10 20

Assets Used in Oil and Gas IndustryAssets used in drilling oil and gas wells 5 6Assets used in exploring and producing oil and gas 7 14

Specialized AssetsAssets unique to wholesale and retail trade, and personal and professional services 5 9

High technology medical equipment 5 5Section 1245 assets used in marketing petroleum and petroleum products 5 9

Real PropertyBillboards 15 20Land improvements (sidewalks, roads, drainage facilities, bridges, fences, landscaping, radio towers) 15 20

Nonresidential real property 39 40Qualified leasehold improvement property1 15 39Qualified restaurant property1 15 39Qualified retail improvement property1 15 39Residential rental property 27.5 40Retail motor fuels outlet 15 20

OtherAppliances, carpet and furniture used in a residential rental property 5 9

Assets used in construction activities by general building contractors, real estate subdividers and developers 5 6

1 15 (GDS/AMT) / 39 (ADS) for property placed in service at certain times before 2015. See Leasehold Improvements on Page 7-9.

2015 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 property3 250,000Maximum deduction (per vehicle) for car, truck or van (including SUVs and minivans) with GVW over 6,000 but not over 14,000 lbs. 25,000

1 The increased Section 179 deduction and qualifying property threshold that applied to tax years beginning in 2014 (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..

2 See Increased Limits for Targeted Areas on Page 5-2.3 See Qualified Real Property on Page 5-8.

Depreciation

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3-Year, 5-Year, 7-Year, 10-Year and 15-Year MACRS Property Half-Year Convention—General Depreciation System

Year Depreciation Rate for Recovery Period3-year 5-year 7-year 10-year 15-year

1 33.33% 20.00% 14.29 % 10.00 % 5.00%2 44.45 32.00 24.49 18.00 9.503 14.81 19.20 17.49 14.40 8.554 7.41 11.52 12.49 11.52 7.705 11.52 8.93 9.22 6.936 5.76 8.92 7.37 6.237 8.93 6.55 5.908 4.46 6.55 5.909 6.56 5.9110 6.55 5.9011 3.28 5.9112 5.9013 5.9114 5.9015 5.9116 2.95

Assets for which Straight-Line Method Required Asset Recovery Period

Real estate—commercial 39 yearsReal estate—residential rental 27.5 yearsListed property used 50% or less in trade or business ADS recovery periodTrees or vines bearing fruits or nuts 10 yearsProperty used predominantly in farming if taxpayer elects out of uniform capitalization rules for plants with long preproductive life ADS recovery periodQualified leasehold improvement property 15 years1

Qualified restaurant property 15 years1

Qualified retail improvement property 15 years1

Property used predominantly outside of the U.S. ADS recovery periodProperty used in a tax-exempt activity or financed by tax-exempt bonds ADS recovery periodProperty imported from a country subject to trade restrictions ADS recovery periodWater utility property 25 years1 A 15-year recovery period applied to property placed in service at certain

times before 2015. See Leasehold Improvements on Page 7-9.

Depreciation Recapture RulesProperty Held for Over One Year, Sold at a Gain

Asset Description How Gain is TaxedMACRS (placed in service after 1986)

Section 1245 property1 Ordinary to extent of depreciationSection 1250 property2 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 of depreciation

Section 1250 property2 (includes nonresidential real property if SL depreciation used and residential rental property)

Ordinary to extent depreciation exceeds SL, then taxed at 25% maximum rate3 to the extent of SL depreciation

Pre-ACRS (placed in service before 1981)Section 1245 property1 Ordinary to extent of depreciationSection 1250 property2—residential rental property

Ordinary to extent post-1975 depreciation exceeds SL, then taxed at 25% maximum rate3 to the extent of SL depreciation

Section 1250 property2—nonresidential real property

Ordinary to extent post-1969 depreciation exceeds SL, then taxed at 25% maximum rate3 to the extent of SL depreciation

Low-Income HousingSection 1250 property2 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 IntangiblesAmortizable intangibles placed in service after 8/10/93

Ordinary to the extent of amortization

Note: Depreciation includes regular depreciation, special (bonus) 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 LimitsVehicles Placed in Service Before 20151

Placed In Service Cars Trucks and Vans

2014First year (special depreciation applies)2 ................. $ 11,160 $ 11,460First year (no special depreciation) ......................... 3,160 3,460 Second year ............................................................ 5,100 5,500 Third year ................................................................ 3,050 3,350 Fourth year and thereafter ....................................... 1,875 1,975

2013First year (special depreciation applies) .................. $ 11,160 $ 11,360First 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

2012First year (special depreciation applies) .................. $ 11,160 $ 11,360First 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

2011First year (special depreciation applies) ................. $ 11,060 $ 11,260First year (no special depreciation) ........................ 3,060 3,260Second year ........................................................... 4,900 5,200Third year ............................................................... 2,950 3,150Fourth 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 2014 unless legislation is enacted that extends the provision.

Depreciation Quickfinder® Handbook© 2015 Thomson Reuters/Tax & Accounting. Thomson Reuters, Checkpoint, Quickfinder and the Kinesis logo are trademarks of Thomson Reuters and its affiliated companies.

ISSN 1945-2775ISBN 978-0-7646-7404-8

P.O. Box 115008, Carrollton, TX 75011-5008Phone 800-510-8997 • Fax 888-286-9070tax.thomsonreuters.comThe 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 aver-age 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.

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The IRS subsequently increased the threshold to $2,500. See the 12/28/15 post in the Late-breaking Develop-ments Impacting 2015 Returns category of the Updates section at http://tax.thomsonreuters.com/quickfinder.

the cost of acquisition because these costs are considered trans-action costs. See Inherently facilitative costs on Page 1-6. [Reg. §1.263(a)-2(f)(2)]

Example: CLO, an LLC, purchases all the assets of FWT, Inc., and, in con-nection with the purchase, hires a transportation company to move storage tanks from FWT’s plant to CLO’s plant. CLO must capitalize the amount paid to move the storage tanks from FWT’s plant to CLO’s plant because this cost is inherently facilitative to the acquisition of personal property.

De Minimis Safe Harbor ElectionA de minimis safe harbor election allows certain property that would otherwise be capitalized to be expensed. To qualify for the safe harbor, taxpayers must have accounting procedures in place at the beginning of the year, under which they expense for nontax purposes amounts paid for property costing less than a specified dollar amount or that has a useful life of 12 months or less. [Reg. §1.263(a)-1(f)]Taxpayers with an applicable financial statement (AFS). Tax-payers with an AFS (see Applicable financial statement below) must have written accounting procedures in place to make the safe harbor election. If so, they can expense (for tax) property that costs up to $5,000 (per item) if, in accordance with their written accounting procedures, that property is expensed on their AFS.Taxpayers without an AFS. If these taxpayers have accounting procedures in place at the beginning of the year, under which they expense for nontax purposes amounts paid for property costing less than a specified dollar amount or that has a useful life of 12 months or less, they can expense (for tax) property that costs up to $500 (per item) if that amount is expensed on their books and records.N Observation: For taxpayers without an AFS, the regulations do not require written accounting procedures to qualify for the safe harbor. However, some practitioners believe this was a drafting error. The safest approach might be to reduce the procedures to writing if using the safe harbor to expense de minimis amounts for tax.

Example: Asta, Inc. purchases 10 printers at $250 each. Asta does not have an AFS. Asta has accounting procedures in place at the beginning of the year to expense (for non-tax purposes) amounts paid for property costing less than $500. Asta expenses the $2,500 paid for the printers on its books and records. If Asta elects to apply the de minimis safe harbor, it may not capitalize (for tax purposes) the amount paid for the printers or any other amounts that meet the safe harbor criteria. Instead, Asta deducts the $2,500 in the year it is paid.

Making the election. The safe harbor is elected annually by includ-ing a statement in the taxpayer’s timely filed (including extensions) tax return for the year the amounts are paid.U Caution: If the de minimis safe harbor is elected, it generally must be applied to all amounts that qualify, including the cost of materials and supplies [Reg. §1.263(a)-1(f)]. See Materials and Supplies on Page 1-11. Taxpayers without accounting policy in place. Taxpayers who do not have the appropriate accounting policy in place at the beginning of the year cannot make the safe harbor election. However, items with a cost of $200 or less (or a useful life of one year or less) are materials and supplies that generally can be expensed in the year paid or first used in the taxpayer’s business (depending on whether or not they are incidental). See Materials and Supplies on Page 1-11.Applicable financial statement. An applicable financial statement (AFS) is one of the following: [Reg. §1.263(a)-1(f)(4)]1) A financial statement required to be filed with the SEC.2) A certified audited financial statement used for credit purposes.3) A certified audited financial statement used for reporting to

shareholders, partners or similar persons.

4) A certified audited financial statement used for any other sub-stantial non-tax purpose.

5) A financial statement (other than a tax return) required to be provided to the federal government, a state government or a federal or state agency other than the IRS or SEC.

The preceding is listed in priority order. Therefore, if the taxpayer has more than one of the financial statements in this list, the high-est on the list is the AFS.

Costs That Do Not Increase BasisCertain costs that do not increase a property’s basis include: (IRS Pub. 551)1) Rent for occupancy of the property before closing.2) Charges connected with getting a loan, such as: a) Points (discount points, loan origination fees). b) Mortgage insurance premiums. c) Loan assumption fees. d) Cost of a credit report. e) Fees for an appraisal required by a lender.3) Fees for refinancing a mortgage. If these costs relate to business property, item 1 is deductible as a business expense. Items 2 and 3 must be capitalized as costs of getting a loan and can be deducted over the period of the loan.See Example of a Closing Statement—Purchase of a Rent House on Page 1-18, which illustrates the tax treatment of various costs, assuming the property is used for business or investment, not as a personal residence.

Currently DeDuCtible repairsFinal regulations, effective for tax years beginning after 2013, provide guidance on when costs associated with tangible property must be capitalized as an improvement versus being currently expensed as a repair. See Tangible Property Regulations on Page 1-4 for rules on applying these regulations.Taxpayers generally may deduct amounts paid for repairs and maintenance to tangible property if the amounts paid are not oth-erwise required to be capitalized under Code Section 263(a) or any other provision of the Code or regulations. [Reg. §1.162-4(a)]Repairs undertaken contemporaneously with improvements that do not directly benefit or are not incurred because of the improvement, do not have to be capitalized. [Reg. §1.263(a)-3(g)(1)]

Example: A company takes a truck out of service to overhaul its chassis. During the overhaul, the truck’s broken taillights are replaced and tears in the driver’s seat are mended. These expenses are deductible as repairs.

Exception: An individual may capitalize amounts paid for repairs made to his residence if made at the same time as remodeling improvements. This rule applies only to the part of the residence not used for business.Election to capitalize. Taxpayers can elect to capitalize repair and maintenance costs consistent with their books and records. [Reg. §1.263(a)-3(n)]

Safe Harbor for Routine Maintenance Costs of regularly scheduled, routine maintenance performed on a unit of property (see Unit of Property on Page 1-8) can be deducted currently. Routine maintenance includes: [Reg. §1.263(a)-3(i)]1) Inspection. 2) Cleaning. 3) Testing. 4) Replacing parts. Continued on the next page

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5) Other recurring maintenance that keeps a unit of property in its ordinary efficient operating condition.

Activities are routine only if, when the unit of property is placed in service, the taxpayer reasonably expects to perform them more than once during the asset’s class life. The class life is generally the alternative depreciation system (ADS) recovery period (re-gardless of whether the property is depreciated under the ADS). Exception: For buildings and building structures, activities are routine if a taxpayer reasonably expects to perform them more than once during a 10-year period beginning with the property’s placed-in-service date.Factors used to determine whether mainte-nance costs are routine include:1) Recurring nature of the activity.2) Industry practice. 3) Manufacturers’ recommendations.4) Taxpayer’s experience.

Example: The FAA requires an airline company to establish and perform prescribed periodic maintenance on each aircraft engine in its fleet. The maintenance is performed based on engine usage and is expected to be performed more than once during an engine’s 12-year class life. Because this maintenance involves recurring activities expected to be performed based on usage and keeps the aircraft in ordinarily efficient operating condition, it does not improve the aircraft. Therefore, the associated costs are not capitalized.Variation: Assume the same facts except that in year 15 (after its 12-year class life) the airline company performs the prescribed engine maintenance on one of its original aircraft engines. Because these repairs meet the same conditions as the original facts, they are not deemed to improve the aircraft. Therefore, they are currently deducted.

U Caution: Routine maintenance does not include amounts paid: [Reg. §1.263(a)-3(i)(3)]1) For a betterment to a unit of property (see Betterment on Page

1-10) or to adapt it to a new or different use (see Adaptation to a New or Different Use on Page 1-11).

2) For repairs, maintenance or improvements to network assets.3) To replace a component of a unit of property if the taxpayer

has properly deducted a loss for that component (other than a casualty loss under Regulation Section 1.165-7).

4) To replace a component of a unit of property if the taxpayer has properly taken into account the component’s adjusted basis in real-izing gain or loss resulting from the component’s sale or exchange.

5) To repair damage to a unit of property for which the taxpayer is required to take a basis adjustment as a result of a casualty loss under Code Section 165 or relating to a casualty event described in Code Section 165.

6) To return a unit of property to its ordinarily efficient operating condition if the property has deteriorated to a state of disrepair and is no longer functional for its intended use.

7) For repairs, maintenance or improvement of rotable and tem-porary spare parts to which the taxpayer applies the optional accounting method. See Rotable and Temporary Spare Parts Optional Method on Page 1-13.

N Observation: Amounts described in items 3-6 are included in the definition of restorations. See Restoration on Page 1-11.

Safe Harbor for Buildings Owned by Small TaxpayersTaxpayers with average annual gross receipts of $10 million or less can deduct the cost of improvements made to eligible building property provided the total amount paid for repairs, maintenance

and improvements for that property during the year does not ex-ceed the lesser of: [Reg. §1.263(a)-3(h)]1) $10,000 or 2) 2% of the property’s unadjusted basis.Eligible building property includes a building, condominium or co-operative with an unadjusted basis of $1 million or less. Amounts paid for repairs, maintenance and improvements include amounts not capitalized under the de minimis safe harbor election (see De Minimis Safe Harbor Election on Page 1-7) and amounts deemed not to improve property under the routine maintenance safe harbor (see Safe Harbor for Routine Maintenance on Page 1-7).U Caution: If the amounts spent on an eligible building exceed the safe harbor amount, the small taxpayer safe harbor is not available for that property.Making the election. The election is made on a per-building basis by including a statement in the taxpayer’s timely filed federal tax return (including extensions) in the year the costs are incurred. The election is irrevocable without IRS consent.

CapitalizeD improvementsGenerally, no deduction is allowed for expenditures for permanent improvements or betterments that increase a property’s value or for amounts expended to restore property or make good the exhaustion thereof. [IRC §263(a)]Final regulations, effective for tax years beginning after 2013, provide guidance on when costs associated with tangible property must be capitalized as an improvement versus being currently expensed as a repair. See Tangible Property Regulations on Page 1-4 for rules on applying these regulations.

Capitalization Test Expenditures that result in any of the following with respect to a unit of property result in an improvement that must be capitalized: [Reg. §1.263(a)-3(d)]1) A Betterment. (See Page 1-10.)2) A Restoration. (See Page 1-11.)3) An Adaptation to a New or Different Use. (See Page 1-11.)If used for business or the production of income, these capitalized improvements may be depreciated.

Unit of PropertyDetermining the unit of property is important, since the three tests for capitalizing expenditures as improvements under the temporary and final regulations look at how the expenditure affects the unit of property. Property other than buildings. Generally, a unit of property is a grouping of functionally interdependent components that must be placed in service together and at the same time in order to perform their intended function. [Reg. §1.263(a)-3(e)(3)(i)]

Example: A computer and printer would not be functionally interdependent since either could be placed in service separately and function independently. But various components of industrial process machinery would be functionally interdependent.

Buildings. Generally, a building and its structural components are a unit of property. However, an expenditure results in an improve-ment to the building if it results in an improvement to either (1) the building and its structural components, excluding structural components designated as building systems or (2) any of the fol-lowing building systems: [Reg. §1.263(a)-3(e)(2)]1) Heating, ventilation and air conditioning (HVAC) systems.

Safe harbor for retailers and restaurants. See the 12/28/15 post in the Late-breaking Developments Impacting 2015 Returns category of the Updates section at http://tax.thomsonreuters.com/quickfinder.


MACRS

maCrs General rulesThe 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 and3) Using the appropriate convention (assumption about

when property is placed in and taken out of service).MACRS consists of two depreciation systems, the General De-preciation 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 residen-tial 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 or2) 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 MethodsThe 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 MethodMethod How to Elect

150% method Enter “150 DB” under column (f) in Part III of Form 4562. 1

SL Enter “S/L” under column (f) in Part III of Form 4562. 1

ADS Complete Section C in Part III of Form 4562.1

1 The election is irrevocable. [IRC §168(b)(5) and (g)(7)]

MACRS Depreciation Methods Available for Regular Tax

PropertyGeneral Depreciation System (GDS) Alternative Depreciation

System (ADS)2No Election Made Elective 150% Declining Balance Method1 Elective SL MACRS

Three-year, five-year, seven-year and 10-year property classes (except farm property).

200% declining balance over GDS recovery period.


Straight-line over GDS recovery period.

Straight-line over ADS recovery period.

• Farm property (except real property).• 15-year and 20-year property.


N/A

• 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.

Straight-line over GDS recovery period.

N/A

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 2014. Property that would have been classified as such (if placed in service

before 2015) is nonresidential real property if placed in service after 2014, 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.

Tab 2 TopicsMACRS General Rules ........................................... Page 2-1General Depreciation System (GDS) ...................... Page 2-1Alternative Depreciation System (ADS) .................. Page 2-2Assigning the Recovery Period ............................... Page 2-2Conventions ............................................................ Page 2-5Computing Depreciation ......................................... Page 2-6Placed In and Taken Out of Service ........................ Page 2-6Alternative Minimum Tax (AMT) Depreciation ......... Page 2-8Adjusted Current Earnings (ACE)—

C Corporations ..................................................... Page 2-9Farm Property ......................................................... Page 2-9Short Tax Years ..................................................... Page 2-10Special (Bonus) Depreciation ............................... Page 2-12Qualified Disaster Assistance Property ................. Page 2-14General Asset Accounts ........................................ Page 2-15Changes in an Asset’s Use ................................... Page 2-16IRS Guidance on TIPA Extension Provisions ........ Page 2-17


Electing a Slower MethodElecting 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 oper-ating 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.

alternative DepreCiation system (aDs)

Under the alternative depreciation system, assets are depreciated straight-line over their ADS recovery period.

When ADS Is RequiredThe 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 capi-talization rules to certain farming costs is in effect (see Farm Property on Page 2-9).

6) Property imported from a foreign country for which an Executive Order is in effect because the country maintains trade restric-tions or engages in other discriminatory acts.

ADS Recovery PeriodsThe 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 yearsAutomobiles and light duty trucks 5 yearsComputers and peripheral equipment 5 yearsHigh technology telephone station equipment installed on customer premises 5 yearsHigh technology medical equipment 5 yearsNew York Liberty Zone leasehold improvement property 9 yearsPersonal property with no class life 12 yearsNatural gas gathering lines 14 years2

Single purpose agricultural and horticultural structures 15 yearsAny tree or vine bearing fruit or nuts 20 yearsElectric 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 39 years3

Nonresidential real property 40 yearsResidential rental property 40 yearsSection 1245 real property not listed in Revenue Procedure 87-56 40 years

Railroad grading and tunnel bore 50 years1 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 2015.

Tax-exempt use property subject to a lease. The ADS recov-ery 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 perioDThe 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 PeriodsProperty is classified under Code Section 168(e). That classifica-tion determines the GDS recovery period. See MACRS Property Classification on Page 2-3.

Revenue Procedure 87-56 Recovery PeriodsRevenue Procedure 87-56 (reproduced at Tab 12) lists the recovery periods for many assets not specified in MACRS Property Clas-sification 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 Deprecia-tion 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, Ex-

cept 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 re-covery 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 as-set 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 ap-propriate column following the description.

Continued on Page 2-4


MACRS Property Classification1

Classification ExamplesGDS

Depreciation Method2

GDSRecovery

PeriodConvention

3-year property • Tractor units for over-the-road use.• Any race horse more than two years old 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


7-year property • Office furniture and fixtures (such as desks, files and safes).• Agricultural machinery and equipment.6

• Motorsports entertainment complex placed in service after October 22, 2004 and before 2017.• 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


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


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 2015.1, 7

• Qualified restaurant property (see Tab 7) placed in service before 2015.1, 7

• Qualified retail improvement property (see Tab 7) placed in service before 2015.1, 7

• 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


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


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

Residential rental property

Any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental income for the tax year is from dwelling units. 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).

Straight-line 27.5 years Mid-month

Nonresidential real property10

Section 1250 property that is neither residential rental property nor property with a class life of less than 27.5 years (see Tab 7). Examples include office buildings, stores or warehouses.

Straight-line 39 years Mid-month

1 Expired Provision Alert: Several provisions expired for property placed in service after 2014. 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 Race horses placed in service after December 31, 2008 and before January 1, 2017, regardless of age, are three-year property. [IRC §168(e)(3)(A)]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.


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.

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, Manu-facture 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 improve-ments 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.

Property Used in Retail/Distributive Trades or ServicesAsset 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 ExamplesPersonal Services Dry cleaners, beauty and barber shops, hotels and

motels, photography studios and mortuaries.Professional Services Doctors, dentists, attorneys, accountants, engineers,

architects and veterinarians.Retail Trade Grocery and department stores, restaurants, cafes,

coin-operated dispensing machines and retail stores. Wholesale Beverage distributors.

1 This is not an exhaustive list.

Property Used in a Residential Rental ActivityThe 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

IRS Pub. 527

Recovery Period in YearsAssets GDS ADS

Computers and their peripheral equipment ....................... 5 ...................... 5Office machinery, such as typewriters,

calculators, copiers ......................................................... 5 ...................... 6Automobiles ....................................................................... 5 ...................... 5Light trucks ........................................................................ 5 ...................... 5Appliances, such as stoves, refrigerators, etc. .................. 5 ...................... 9Carpets .............................................................................. 5 ...................... 9Furniture used in rental property ....................................... 5 ...................... 9Office furniture and equipment (desks, file

cabinets, etc.) ................................................................. 7 .................... 10Any 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 .................... 20Shrubbery ....................................................................... 15 .................... 20Fences ............................................................................. 15 .................... 20Residential 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 2015, special recovery periods applied to qualified Indian reserva-tion property. This provision is not available for property placed in service after 2014, unless legislation is enacted to extend it. This discussion is included in the event that the shorter recovery periods are extended to 2015. If they are not extended, property that formerly was classified as qualified Indian reservation property and placed in service in 2015 is depreciated under the general MACRS rules.The recovery periods for qualified property placed in service on an Indian reservation after 1993 and before 2015 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)]

Recovery Periods for Qualified Indian Reservation Property

Property Classification Recovery Period Depreciation MethodThree-year property Two years 200% DBFive-year property Three years 200% DB

Seven-year property Four years 200% DB10-year property Six years 200% DB15-year property Nine years 150% DB20-year property 12 years 150% DB

Nonresidential real property 22 years SLSee Tab 4 for optional tables for computing depreciation for qualified Indian reservation property.

2017


Conventions

Half-Year ConventionUnder 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 and2) Property subject to the mid-quarter conven-

tion (discussed below).

Mid-Quarter ConventionIf more than 40% of the basis of property is placed in service in the last three months of the year, the mid-quarter convention applies to all property (other than the Excluded items listed below) placed in service during the year. [IRC §168(d)(3)]. Then, all property placed in service or disposed of during any quarter of a tax year is treated as placed in service, or disposed of, at the midpoint of that quarter.Excluded items. To determine if the mid-quarter convention ap-plies, the following items are not counted: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.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 conven-tion 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 37.5Third 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 total and may result in the application of the mid-quarter conven-tion for any assets not expensed under Code Section 179. See the Section 179 Annual Limits table on Page 5-1.

Example: Norm is a calendar-year sole proprietor. He placed the following assets in service during 2015:

Date Description CostJanuary ....................................... Polishing machine ........................ $ 477,000December ................................... Grinding machine ......................... 78,000Total ................................................................................................... $ 555,000Norm 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 2015.For the 40% test (to determine if the mid-quarter convention applies) Norm counts only the $55,000 ($477,000 – $422,000 expensed under Code Section 179) remaining basis in the polishing machine placed in service in January. The amounts expensed under Code Section 179 are not considered. Thus, the mid-quarter convention does not apply to Norm in 2015 since 100% of the basis of property considered for the test was placed in service in the first quarter. The $55,000 remaining basis in the polishing machine is depreciated using the half-year convention.Variation: Now assume that Norm claims a $477,000 Section 179 deduction for the polishing machine. For the 40% test, he has placed $17,000 of assets in service in 2015: $5,000 ($30,000 − $25,000) in the first quarter and $12,000 in the fourth quarter. Since $12,000 exceeds $6,800 ($17,000 × 40%), the mid-quarter convention applies to the assets placed in service in 2015.

Mid-Month ConventionThe mid-month convention applies to residential rental and non-residential 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.

Mid-Month Convention Percentages

Month Placed in Service/Disposed of

% of Full Year Depreciation—Placed

in Service Year

% of Full Year Depreciation—

Disposition Year1 95.83 % 4.17 %2 87.50 12.503 79.17 20.834 70.83 29.175 62.50 37.506 54.17 45.837 45.83 54.178 37.50 62.509 29.17 70.8310 20.83 79.1711 12.50 87.5012 4.17 95.83

Convention in Year of DispositionIf 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.

and a $23,000 Section 179 deduction for the grinding machine.

the $55,000 ($78,000 - $23,000) remaining basis of the grinding machine in service in December. Since that is 100% of the basis counted for the 40% test, 100% of Norm's assets were placed in service in the last three months of the year and the mid-quarter convention applies to the ginding machine's remaining $55,000 basis.


Example #1: Leroy has previously grown only small grain. Leroy has never been subject to the uniform capitalization (UNICAP) rules because the pre-productive period of this crop is less than two years. However, Leroy plants an apple orchard in the current year and the UNICAP rules apply to the orchard because the preproductive period for apples is greater than two years. Leroy elects not to have the UNICAP rules apply by deducting all preproductive period costs associated with the apple orchard on his current-year Schedule F. As a result of the election to avoid UNICAP, Leroy must use ADS depreciation for all property placed in service in his farming business during the year of the election, including assets solely used in the grain activity.

Example #2: Green Farm, Inc. is actively involved in agricultural activities. 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 YearsPlants 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 yearsThe 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 deduc-tions 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 BeginsThe 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.

Farm Property Recovery PeriodsIRS Pub. 225 and Rev. Proc. 87-56

Recovery Period in Years

Assets GDS ADSAgricultural structures (single purpose) ................ 10 15

Airplanes (including helicopters) 1 ........................ 5 6

Automobiles .......................................................... 5 5Calculators and copiers ........................................ 5 6Cattle (dairy or breeding) ...................................... 5 7

Communication equipment 2 ................................. 7 10

Computer and peripheral equipment .................... 5 5Cotton ginning assets ........................................... 7 12Drainage facilities ................................................. 15 20

Farm buildings 3 .................................................... 20 25

Farm machinery and equipment 4 ......................... 7 10

Fences (agricultural) ............................................. 7 10Goats and sheep (breeding) ................................. 5 5Grain bins ............................................................. 7 10Hogs (breeding) .................................................... 3 3Horses (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 15House trailers for farm laborers—mobile (has wheels and a history of movement) ................... 7 10House 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 6 ................... 5 6

Nonresidential real property ................................ 39 7 40

Office furniture, fixtures and equipment (not calculators, copiers or typewriters) .................... 7 10Paved lots ............................................................ 15 20Residential rental property ................................... 27.5 40Tractor units (over-the-road) ................................ 3 4Trees or vines bearing fruit or nuts ...................... 10 20 Truck (heavy duty, unloaded weight 13,000 lbs. or more) .......................................... 5 6Truck (actual weight less than 13,000 lbs.) ......... 5 5Vineyard trellising ................................................ 7 10Water wells (for raising poultry and livestock) ..... 15 201 Not including airplanes used in commercial or contract carrying of passengers.2 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 seven-

year) property. Five-year treatment excluded grain bins, cotton ginning assets, fences or other land improvements.

5 For race horses, regardless of age, placed in service after December 31, 2008 and before January 1, 2017. 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.

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.


Example: On April 1, 2015, Geo Corp. buys and places in service a $40,000 passenger auto, which is used 80% for corporate business and 20% personally by Geo’s president. Tax year 2015 for Geo is a short tax year of six months that begins in calendar-year 2015 and includes April 1, 2015. The maximum amount of MACRS deductions (under any MACRS depreciation method and any applicable convention) that Geo may claim for the car for its 2015 short tax year is $1,264 (80% business use × 6/12 × $3,160 first year depreciation limit for a passenger auto placed in service in 2015—see Tab 6). This is true even if Geo elects to expense $3,160 of the car’s basis under Section 179, since the first year depreciation (Section 280F) limit applies to the sum of any special (bonus) depreciation allowance (if available), MACRS depreciation and Section 179 expense claimed (see Tab 6).

Section 179 Deduction for a Short Tax YearIf a Section 179 deduction is elected for property placed in service in a short tax year, no pro-ration of the Section 179 expense is required [Reg. §1.179-1(c)]. However, the first-year depreciation limits on business vehicles are reduced in a short tax year, which may limit the Section 179 deduction for these assets if placed in service in a short tax year, as discussed at Vehicle depreciation limits on Page 2-11.

Computing Depreciation After a Short YearFor the tax years after the first short year, depreciation may be computed using either the simplified method or the alloca-tion 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 depre-ciation 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 (includ-ing 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 Allowance2............................................. ($1,000 – $167) × 40% = $3333............................................. ($1,000 – $167 – $333) × 40% = $200

Example #2: Assume the same facts as in Example #1, except that the al-location 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 Depreciation Allowance1........... 40% × $1,000 × 5/12 = $1672........... (40% × $1,000 × 7/12) + (40% × $600 × 5/12) = $3333........... (40% × $600 × 7/12) + (40% × $360 × 5/12) = $200

speCial (bonus) DepreCiation

Expired Provision Alert: For qualified assets placed in service before 2015, special depreciation was available. With the excep-tion of Long Production Period Property and Aircraft below, special depreciation is not available for property placed in service after 2014, unless legislation is enacted to extend it. This discussion is included in the event that special depreciation is extended to 2015.

The special depreciation allowance for 2014 generally equals 50% of the property’s basis [IRC §168(k)(1)(A)]. See the Special Depre-ciation Percentages table below for percentages for other years.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 on Page

2-13.2) 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 2008–2014. For self-constructed property this test is met if the taxpayer begins manufacturing, constructing or producing the property during 2008–2014.

4) It must be placed in service before 2015. Exception: See Long Production Period Property and Aircraft on Page 2-13 for the extended placed in service date for certain assets.

Special Depreciation Percentages

Date Qualifying Property Placed in Service

Special Depreciation Allowance Percentage

Before 2008 0%

1/1/08–9/8/10 50%

9/9/10–12/31/111, 2 100%

2012–20173 50%

2018 40%

1 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%, 40% and 30% special depreciation allowance if placed in service in 2018, 2019 and 2020, respectively. See Long Production Period Property and Aircraft on Page 2-13.

2015

50%

2017 2018

2019 30%

After 2019 0%


Computing the DeductionDetermine 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 deduc-tion computed after any Section 179 deduction (if applicable) and before regular MACRS depreciation is calculated.N Observation: Fiscal year and short tax year filers, with tax years ending in 2014, that filed their tax return before special (bonus) depreciation was extended, may retroactively claim spe-cial (bonus) depreciation or revoke an election not to claim it for qualified property placed in service in 2014 (Rev. Proc. 2015-48). See IRS Guidance on TIPA Extension Provisions on Page 2-17.

Qualified PropertyTo 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 lease-

hold improvement property below).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 Depre-

ciation 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 im-provement 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 im-provement 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 prop-erty since they are not installed to the interior of the building. (CCA 201310028)

U Caution: Leases between related parties do not qualify. Related parties include an individual and his or her spouse, children, grand-children, parents, grandparents and siblings. They also include an individual and certain entities (for example, corporations) if the indi-vidual 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 de-preciation on its own) that also fall within the definition of qualified leasehold improvement property are eligible for special deprecia-tion. (Rev. Proc. 2011-26)

Original UseTo qualify for the special (bonus) depreciation allowance, the as-set 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:•NewpropertyacquiredafterDecember31,2007forpersonaluse

and subsequently converted to business use meets the original use requirement.

•Capitalexpenditurestoreconditionorrebuildacquiredorownedproperty satisfy the original use requirement.

•Assetsthatarereconditionedorrebuiltbeforethetaxpayerbuysthem generally don’t meet the original use test, but property con-taining 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.

•AssetsplacedinserviceafterDecember31,2007byapersonand 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.

Example: During 2015, 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 allow-ance, assuming all other requirements are also met.

Long Production Period Property and AircraftQualified property includes long production period property and certain noncommercial aircraft placed in service before 2016.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

2019

for 50% bonus depreciation


time of contract for purchase, the purchaser makes a nonrefund-able 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 2015 qualifies for 50% special depreciation only to the extent of adjusted basis attributable to manufacture, construction or production before 2015. [IRC §168(k)(2)(B)(ii)]

Electing Out of the Special (Bonus) Depreciation AllowanceA 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 DepreciationTaxpayer 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 CreditsCorporations may forego the special (bonus) depreciation allow-ance 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 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, 2013, and 2014 (2011–2015 for long production period property and certain aircraft) [IRC §168(k)(4)(D)]. The election can be made for Round Two property, Round Three property, or Round Four 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), 2012 (Round Three), or 2013 (Round Four). However, corporations that have already made this election for an earlier year can elect to not apply the election to Round Two, Round Three, or Round Four property. Also, for Round Two, Round Three, or Round Four property, the limit on unused research credits cannot be increased by making this election.See Rev. Proc. 2008-65, Rev. Proc. 2009-16, Rev. Proc. 2009-33 and Rev. Proc 2015-48 for guidance on making the election. See also IRS Guidance on TIPA Extension Provisions on Page 2-17.

Qualified Recycling and Biofuel Plant PropertyA 50% special (bonus) depreciation allow-ance 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 2015. [IRC §168(l)] 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, dis-tribute or recycle qualified reuse and recyclable materials such as:•Scrapplastic,glass,textiles,rubberorpackaging.•Recoveredfiber.•Scrapferrousandnonferrousmetalsorelectronicscrap(suchas

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 cel-lulose, 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 ser-vice 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 6) Residential rental property.Qualified disaster assistance property must also meet the follow-ing 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).

2018 2017

and 2015 2016

or Round Five property,or 2014 (Round Five)or Round Five

before 2019


taxpayer elects this treatment by calculating depreciation (on the timely filed, including extensions, federal income tax return for the year of change) as though the change had not occurred.

Example: In 2010, Dakota Corp, a calendar-year corporation, placed equip-ment costing $100,000 in service. The company used the equipment from 2010 – 2014 in its Alpha line of business. The equipment was properly depreciated using a seven-year recovery period, the 200% declining balance (DB) method and the half-year convention.Beginning in 2015, Dakota starts using the equipment in its Beta line of business. As a result, the equipment is assigned a five-year recovery period under Rev. Proc. 87-56. The depreciation method stays the same. Deprecia-tion deductions for 2015 and subsequent years are determined as though Dakota placed the equipment in service in 2015 in its Beta line of business. On January 1, 2015, the equipment’s adjusted basis is $22,311. The depre-ciation deduction for 2015 (the deemed placed-in-service year) is computed without considering the half-year convention. Therefore, the 2015 deduction is $8,924 ($22,311 × 40%). The 2016 deduction will be $5,355 [($22,311 – $8,924) × 40%].Variation: Dakota can elect to disregard the change in use and continue to depreciate the equipment over its original seven-year recovery period.

@ Strategy: If an asset is near the end of its recovery period, ignoring the change in use may be advantageous, since the remain-ing basis will be written off over the remainder of the original re-covery period, which may be shorter than the new recovery period.Longer recovery period and/or slower method after change in use. If the change in use results in a longer recovery period and/or slower depreciation method, the adjusted basis as of the begin-ning of the year of change is depreciated using the longer period and/or slower method [Reg. §1.168(i)-4(d)(4)]. This rule applies, beginning with the year of change, as though the taxpayer had originally placed the affected property in service with the longer period and/or slower method. The convention that applied to the asset before the change in use continues to apply.The depreciation method for the year of change and any subse-quent year is the method that would apply if the taxpayer had used the longer recovery period and/or slower depreciation method in the placed-in-service year. If the 200% or 150% declining balance (DB) method would have applied in the placed-in-service year, but the DB method would have been switched to straight-line (SL) for the year of change or any prior year, the applicable recovery method beginning with the year of change is the SL method.

If the recovery period is increased, depreciation is based on the remaining recovery period, computed by reducing the revised recovery period by the number of years the asset has been in use (computed under the applicable convention).

Example: In 2013, Winston Corp, a calendar-year corporation, placed equipment costing $100,000 in service. For 2013 and 2014, the equipment was used only within the United States. Winston properly depreciated the equipment in 2013 and 2014 using a five-year recovery period, the 200% DB method and the half-year convention. In 2015, Winston begins using the equipment predominantly outside the United States. As a result, it becomes subject to the ADS rules beginning in 2015. Under ADS, the equipment has a nine-year recovery period and must be depreciated using the SL method. As of January 1, 2015, the equipment’s adjusted basis is $48,000. Winston’s depreciation deductions for 2015 and later years are determined as though the equipment had been used predominantly outside the United States since it was placed in service in 2013.For 2015, the remaining recovery period is 7.5 years (nine-year revised recovery period less 1.5 years in use, applying the half-year convention). Therefore, the 2015 depreciation deduction using the straight-line method is $6,400 ($48,000 ÷ 7.5). The 2016 amount will also be $6,400 [($48,000 – $6,400) ÷ 6.5].

irs GuiDanCe on tipa extension provisions

In Revenue Procedure 2015-48 the IRS provides guid-ance on applying depreciation-related extender provisions, in the Tax Increase Prevention Act of 2014 (TIPA) (enacted December 19, 2014), to previously filed tax returns either by amending the return or by filing Form 3115, Application for Change in Accounting Method. The guidance deals specifically with the retroactive applica-tion of special (bonus) depreciation, the election to forego special (bonus) depreciation and instead claim additional AMT credits, and the carryover of disallowed Section 179 deductions for qualified real property. Various due dates apply depending on the provision and the option chosen.Tax years affected. The guidance provided applies to taxpayers with a fiscal tax year beginning in 2013 and ending in 2014 (a 2013 fiscal tax year) or a short tax year beginning and ending in 2014 (a 2014 short tax year) that filed their 2013 or 2014 return before the TIPA enactment date. Without this guidance, these taxpayers (and their tax professionals) may be uncertain how to claim spe-cial (bonus) depreciation or apply the other provisions referenced above for property placed in service after December 31, 2013 in tax years ending in 2014.

Retroactive Application of Special (Bonus) DepreciationFor affected tax years (see Tax years affected above), taxpayers with qualified property placed in service in 2014 may retroac-tively claim special (bonus) depreciation. The procedure to follow depends on whether the taxpayer elected out of special (bonus) depreciation on the original return.No election out of special (bonus) depreciation. Taxpayers that did not deduct and did not elect out of special (bonus) depreciation may retroactively claim it, by filing either an amended tax return or a Form 3115, Application for Change in Accounting Method. See Tab 10 for information on accounting method changes.Amended returns must be filed before filing the return for the next tax year that follows either the 2013 fiscal tax year or the 2014 short tax year, whichever is applicable. Taxpayers that have both a timely filed 2013 fiscal tax year and 2014 short tax year return must file their amended returns, for both years, before filing their tax return for the first tax year that follows the 2014 short tax year.Taxpayers that choose to file Form 3115 must do so with their timely filed tax return for the first or second tax year that follows the 2013 fiscal tax year or the 2014 short tax year, as applicable, if the taxpayer owns the property as of the first day of the year of change [the year that the taxpayer will deduct the previously foregone special (bonus) depreciation]. Taxpayers that have both a timely filed 2013 fiscal tax year and 2014 short tax year return must file Form 3115 with their timely filed tax return for the first or second tax year that follows the 2014 short tax year.Revoking an election out of special (bonus) de-preciation. A taxpayer can elect not to claim special (bonus) depreciation for any class of property for any tax year [see Electing Out of the Special (Bonus) De-preciation Allowance on Page 2-14]. Taxpayers that elected out of special (bonus) depreciation for a class of property that is qualified property may revoke that election by filing an amended tax return for the 2013 fiscal tax year or the 2014 short tax year, as applicable, by the later of December 4, 2015 or before filing their tax return for the first tax year that follows the 2013 fiscal tax year or the 2014 short tax year.

Note: It's possible the IRS will issue similar guidance for 2015 related to the PATH Act depreciation-related extenders. Tax preparers should watch for developments.


Quick Guide to MACRS Depreciation Tables

Property Class

Regular Tax

Alternative Minimum Tax1General Depreciation System Alternative Depreciation

System1 (if elected or required,

also use for AMT)No election made SL Election

(if elected, also use for AMT)

Property Placed in Service after 19982, 3

3-year, 5-year, 7-year and 10-year (Nonfarm)

200% DBGDS recovery period

Tables 1–4

SLGDS recovery period

Tables 15–19

SLADS recovery period

Tables 15–19


Tables 1–43-year, 5-year, 7-year and 10-year (Farm Property)4, 5


Tables 1–4

SLGDS recovery period

Tables 15–19


Tables 15–19


Tables 1–4

15-year5

150% DB15 yearsTable 5

SL15 yearsTable 5


Tables 15–19

If Section 1250 property, SL

15 years If Section 1245 property,


20-year


SL20 yearsTable 6


Tables 15–19

If Section 1250 property, SL

20 years If Section 1245 property,

150% DB 20 yearsTable 6

Residential Rental Real Property

SL27.5 years

Table 7N/A

SL40 yearsTable 20

SL27.5 years

Table 7

Nonresidential Real Property6 SL39 yearsTable 9

N/ASL

40 yearsTable 20

SL39 yearsTable 9

Property Placed in Service 1987–19983

3-year, 5-year, 7-year and 10-year (Nonfarm)


Tables 1–4

SLGDS recovery period7

Tables 15–19


Tables 15–19

150% DBADS recovery period

Tables 10–143-year, 5-year, 7-year and 10-year (Farm Property placed in service after 1988)4, 5


Tables 1–4

SLGDS recovery period7

Tables 15–19


Tables 15–19

150% DBADS recovery period

Tables 10–1415-year 150% DB

15 yearsTable 5

SL15 years7

Table 5


Tables 15–19


Tables 15–1920-year 150% DB

20 yearsTable 6

SL20 years7

Table 6


Tables 15–19


Tables 15–19Residential Rental Real Property

SL27.5 years

Table 7N/A

SL40 yearsTable 20

SL40 years Table 20

Nonresidential Real Property (placed in service after 1986 and before May 13, 1993)

SL31.5 years

Table 8N/A

SL40 yearsTable 20

SL40 years Table 20

Nonresidential Real Property (placed in service after May 12, 1993 and before 1999)

SL39 yearsTable 9

N/ASL

40 yearsTable 20

SL40 yearsTable 20

1 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 2008–2019 (2020 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 1994–2016 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 2015, and qualified retail improvement property

placed in service during 2009–2014, 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)] after 2008, is


Table 1— Three-Year MACRS

For property placed in service after 1986200% Declining Balance 150% Declining Balance• Regular tax depreciation for personal property with three-year recovery period

[includes all racehorses (placed in service after 2008 and before 2017), racehorses over two years old (placed in service before 2009 and after 2016), other horses more than 12 years old, qualified rent-to-own property, tractors for over-the-road use, qualified Indian reservation property that would otherwise have a 5-year recovery period and assets used in certain activities].

• Regulartaxdepreciationforthree-yearassetsusedinafarmingbusiness.• AMTdepreciationforpropertywiththree-yearrecoveryperiodplacedinservice

after 1998.• Canbeelectedforregulartax.

Year Half-Year Convention

Mid-Quarter Convention— Quarter in Which Acquired Year Half-Year

ConventionMid-Quarter Convention— Quarter in Which Acquired

1 2 3 4 1 2 3 41.....................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 46.883..................... 14.81 12.35 14.14 16.67 20.37 3......................25.00 25.00 25.00 25.00 25.004....................... 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

For property placed in service after 1986200% Declining Balance 150% Declining Balance• Regular tax depreciation for personal property with five-year recovery period

(includes autos, computers, typewriters, copiers and assets used in certain activities).

• Regulartaxdepreciationforfive-yearassetsusedinafarmingbusiness.• AMTdepreciationforpropertywithfive-yearrecoveryperiodplacedinservice





1 2 3 4 1 2 3 41.....................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 28.883..................... 19.20 15.60 18.00 20.40 22.80 3...................... 17.85 16.52 17.06 18.64 20.214......................11.52 11.01 11.37 12.24 13.68 4...................... 16.66 16.52 16.76 16.56 16.405......................11.52 11.01 11.37 11.30 10.94 5...................... 16.66 16.52 16.76 16.57 16.416....................... 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

For property placed in service after 1986200% Declining Balance 150% Declining Balance• Regular tax depreciation for personal property with seven-year recovery period

(includes office furniture and fixtures, horses not eligible for a three-year recovery period and assets used in certain activities).

• Regulartaxdepreciationforseven-yearassetsusedinafarmingbusiness.• AMTdepreciationforpropertywithseven-yearrecoveryperiodplacedinservice





1 2 3 4 1 2 3 41..................... 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 20.853......................17.49 15.31 16.76 18.22 19.68 3......................15.03 13.68 14.58 15.48 16.394......................12.49 10.93 11.97 13.02 14.06 4......................12.25 12.16 12.22 12.27 12.875........................8.93 8.75 8.87 9.30 10.04 5......................12.25 12.16 12.22 12.28 12.186........................8.92 8.74 8.87 8.85 8.73 6......................12.25 12.16 12.22 12.27 12.187........................8.93 8.75 8.87 8.86 8.73 7......................12.25 12.16 12.23 12.28 12.198........................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

For property placed in service after 1986200% Declining Balance 150% Declining Balance• Regular tax depreciation for personal property with 10-year recovery period

(includes boats not used for transportation and assets used in certain activities).• Regular tax depreciation for 10-year assets used in a farming business (including

single-purpose farm structures).• AMTdepreciationforpersonalpropertywith10-yearrecoveryperiodplacedin

service after 1998.• Canbeelectedforregulartax.




1 2 3 4 1 2 3 41......................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 14.723......................14.40 13.20 14.00 14.80 15.60 3...................... 11.79 11.08 11.55 12.03 12.514...................... 11.52 10.56 11.20 11.84 12.48 4...................... 10.02 9.41 9.82 10.23 10.635........................9.22 8.45 8.96 9.47 9.98 5........................ 8.74 8.71 8.73 8.75 9.04

6........................7.37 6.76 7.17 7.58 7.99 6........................ 8.74 8.71 8.73 8.75 8.727........................6.55 6.55 6.55 6.55 6.55 7........................ 8.74 8.71 8.73 8.75 8.728........................6.55 6.55 6.55 6.55 6.55 8........................ 8.74 8.71 8.73 8.74 8.729........................6.56 6.56 6.56 6.56 6.56 9........................ 8.74 8.71 8.73 8.75 8.7210......................6.55 6.55 6.55 6.55 6.55 10...................... 8.74 8.71 8.73 8.74 8.71

11 ......................3.28 0.82 2.46 4.10 5.74 11 ...................... 4.37 1.09 3.28 5.47 7.63These 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 5— 15-Year MACRS

For property placed in service after 1986150% Declining Balance Straight-Line• Regular tax depreciation for property with a 15-year recovery period, including

land improvements (both Section 1245 and 1250 property) and assets used in certain activities.

• Regulartaxdepreciationforqualifiedleaseholdimprovementpropertyandqualified restaurant property placed in service after 10/22/04 and before 2015, and qualified retail improvement property placed in service during 2009–2014.

• AMTdepreciationfor15-yearpropertyplacedinserviceafter1998thatisSection1250 property.

• ADSdepreciationforassetswith15-yearADSlife.• CanbeelectedforregulartaxandAMT.




1 2 3 4 1 2 3 41.......................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 6.673....................... 8.55 8.21 8.44 8.66 8.89 3........................6.67 6.67 6.67 6.67 6.674....................... 7.70 7.39 7.59 7.80 8.00 4........................6.67 6.67 6.67 6.67 6.675....................... 6.93 6.65 6.83 7.02 7.20 5........................6.67 6.67 6.67 6.67 6.67

6....................... 6.23 5.99 6.15 6.31 6.48 6........................6.67 6.67 6.67 6.67 6.677....................... 5.90 5.90 5.91 5.90 5.90 7........................6.67 6.67 6.66 6.66 6.678....................... 5.90 5.91 5.90 5.90 5.90 8........................6.66 6.66 6.67 6.67 6.669....................... 5.91 5.90 5.91 5.91 5.90 9........................6.67 6.67 6.66 6.66 6.6710..................... 5.90 5.91 5.90 5.90 5.91 10......................6.66 6.66 6.67 6.67 6.66

11 ..................... 5.91 5.90 5.91 5.91 5.90 11 ......................6.67 6.67 6.66 6.66 6.6712..................... 5.90 5.91 5.90 5.90 5.91 12......................6.66 6.66 6.67 6.67 6.6613..................... 5.91 5.90 5.91 5.91 5.90 13......................6.67 6.67 6.66 6.66 6.6714..................... 5.90 5.91 5.90 5.90 5.91 14......................6.66 6.66 6.67 6.67 6.6615..................... 5.91 5.90 5.91 5.91 5.90 15......................6.67 6.67 6.66 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 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.

after 2008


Table 20— Straight-Line—40-Year Mid-Month Convention

For property placed in service after 1986• 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 ConventionFor qualified property placed in service in 2008–2017 (2018 for certain long production period property and aircraft)

Year 200% declining balance 150% declining balance

3-year 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 2.231010......................................................................................................................................................3.275 2.950 2.2305

11 ......................................................................................................................................................1.640 2.955 2.231012.............................................................................................................................................................................................2.950 2.230513.............................................................................................................................................................................................2.955 2.231014.............................................................................................................................................................................................2.950 2.230515.............................................................................................................................................................................................2.955 2.2310

16.............................................................................................................................................................................................1.475 2.230517................................................................................................................................................................................................................................. 2.231018................................................................................................................................................................................................................................. 2.230519................................................................................................................................................................................................................................. 2.231020................................................................................................................................................................................................................................. 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 2015 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 QuarterFor qualified property placed in service in 2008–2017 (2018 for certain long production period property and aircraft)

Year 200% declining balance 150% declining balance3-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

6....................................................................... 0.690 4.370 3.380 2.995 2.5650 7.............................................................................................................. 4.375 3.275 2.950 2.3730 8.............................................................................................................. 0.545 3.275 2.955 2.2295 9......................................................................................................................................................3.280 2.950 2.229510......................................................................................................................................................3.275 2.955 2.2295

11 ......................................................................................................................................................0.410 2.950 2.229512.............................................................................................................................................................................................2.955 2.230013.............................................................................................................................................................................................2.950 2.229514.............................................................................................................................................................................................2.955 2.230015.............................................................................................................................................................................................2.950 2.2295

16.............................................................................................................................................................................................0.370 2.230017................................................................................................................................................................................................................................. 2.229518................................................................................................................................................................................................................................. 2.230019................................................................................................................................................................................................................................. 2.229520................................................................................................................................................................................................................................. 2.2300

21................................................................................................................................................................................................................................. 0.2825Note: For early disposition, see Convention in Year of Disposition on Page 2-5.Caution: Special (bonus) depreciation will be available in 2015 for certain long production period property and aircraft only, unless legislation is enacted that extends the provision to other property.


Property Placed in Service in Second QuarterFor qualified property placed in service in 2008–2017 (2018 for certain long production period property and aircraft)


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

6....................................................................... 2.130 4.435 3.585 3.075 2.6165 7.............................................................................................................. 4.435 3.275 2.955 2.4205 8.............................................................................................................. 1.670 3.275 2.950 2.2390 9......................................................................................................................................................3.280 2.955 2.231510......................................................................................................................................................3.275 2.950 2.2315

11 ......................................................................................................................................................1.230 2.955 2.231512.............................................................................................................................................................................................2.950 2.231513.............................................................................................................................................................................................2.955 2.231514.............................................................................................................................................................................................2.950 2.231515.............................................................................................................................................................................................2.955 2.2310

16.............................................................................................................................................................................................1.105 2.231517................................................................................................................................................................................................................................. 2.231018................................................................................................................................................................................................................................. 2.231519................................................................................................................................................................................................................................. 2.231020................................................................................................................................................................................................................................. 2.2315

21................................................................................................................................................................................................................................. 0.8365Note: For early disposition, see Convention in Year of Disposition on Page 2-5.Caution: Special (bonus) depreciation will be available in 2015 for certain long production period property and aircraft only, unless legislation is enacted that extends the provision to other property.



Property Placed in Service in Third QuarterFor qualified property placed in service in 2008–2017 (2018 for certain long production period property and aircraft)


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

6....................................................................... 3.530 4.425 3.790 3.155 2.6680 7.............................................................................................................. 4.430 3.275 2.950 2.4680 8.............................................................................................................. 2.765 3.275 2.950 2.2830 9......................................................................................................................................................3.280 2.955 2.230010......................................................................................................................................................3.275 2.950 2.2300

11 ......................................................................................................................................................2.050 2.955 2.2300 12.............................................................................................................................................................................................2.950 2.230013.............................................................................................................................................................................................2.955 2.230514.............................................................................................................................................................................................2.950 2.2300 15.............................................................................................................................................................................................2.955 2.2305

16.............................................................................................................................................................................................1.845 2.230017.................................................................................................................................................................................................................................. 2.230518.................................................................................................................................................................................................................................. 2.230019.................................................................................................................................................................................................................................. 2.230520.................................................................................................................................................................................................................................. 2.2300

21.................................................................................................................................................................................................................................. 1.3940Note: For early disposition, see Convention in Year of Disposition on Page 2-5.Caution: Special (bonus) depreciation will be available in 2015 for certain long production period property and aircraft only, unless legislation is enacted that extends the provision to other property.


Property Placed in Service in Fourth QuarterFor qualified property placed in service in 2008–2017 (2018 for certain long production period property and aircraft)


1..............................54.165% 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

6....................................................................... 4.790 4.365 3.995 3.240 2.7195 7.............................................................................................................. 4.365 3.275 2.950 2.5155 8.............................................................................................................. 3.820 3.275 2.950 2.3270 9......................................................................................................................................................3.280 2.950 2.229010......................................................................................................................................................3.275 2.955 2.2290

11 ......................................................................................................................................................2.870 2.950 2.229012.............................................................................................................................................................................................2.955 2.229013.............................................................................................................................................................................................2.950 2.229014.............................................................................................................................................................................................2.955 2.229015.............................................................................................................................................................................................2.950 2.2290

16.............................................................................................................................................................................................2.585 2.229017.................................................................................................................................................................................................................................. 2.229018.................................................................................................................................................................................................................................. 2.229519.................................................................................................................................................................................................................................. 2.229020.................................................................................................................................................................................................................................. 2.2295

21.................................................................................................................................................................................................................................. 1.9505Note: For early disposition, see Convention in Year of Disposition on Page 2-5.Caution: Special (bonus) depreciation will be available in 2015 for certain long production period property and aircraft only, unless legislation is enacted that extends the provision to other property.


Table 26— Two-Year Qualified Indian Reservation Property,

200% Declining Balance—Half-Year and Mid-Quarter ConventionsFor property placed in service in 1994–2016

Year Half-Year Convention Mid-Quarter Convention–Quarter in Which Acquired

1 2 3 41....................................... 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 2015 unless legislation is enacted that extends the provision.

Table 27— Four-Year Qualified Indian Reservation Property,



1 2 3 41.........................................25.00% 43.75% 31.25% 18.75% 6.25%2.........................................37.50 28.13 34.37 40.63 46.873.........................................18.75 14.06 17.19 20.31 23.444.........................................12.50 12.50 12.50 12.50 12.505...........................................6.25 1.56 4.69 7.81 10.94


Table 28— Six-Year Qualified Indian Reservation Property,



1 2 3 41.........................................16.67% 29.17% 20.83% 12.50% 4.17%2.........................................27.78 23.61 26.39 29.17 31.943.........................................18.52 15.74 17.59 19.44 21.304.........................................12.35 10.49 11.73 12.96 14.205...........................................9.87 9.88 9.88 9.88 9.876...........................................9.87 9.88 9.88 9.88 9.887...........................................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 ConventionFor property placed in service in 1994–2016

Year Month Placed in Service

1 2 3 4 5 6 7 8 9 10 11 12 1............4.356% 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 4.54510............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 4.54512............4.546 4.546 4.546 4.545 4.545 4.546 4.546 4.545 4.545 4.546 4.546 4.54613............4.545 4.545 4.545 4.546 4.546 4.545 4.545 4.546 4.546 4.545 4.545 4.54514............4.546 4.546 4.546 4.545 4.545 4.546 4.546 4.545 4.545 4.546 4.546 4.54615............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 4.54617............4.545 4.545 4.545 4.546 4.546 4.545 4.545 4.546 4.546 4.545 4.545 4.54518............4.546 4.546 4.546 4.545 4.545 4.546 4.546 4.545 4.545 4.546 4.546 4.54619............4.545 4.545 4.545 4.546 4.546 4.545 4.545 4.546 4.546 4.545 4.545 4.54520............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 4.54522............4.546 4.546 4.546 4.545 4.545 4.546 4.546 4.545 4.545 4.546 4.546 4.54623............0.189 0.568 0.947 1.326 1.705 2.083 2.462 2.841 3.220 3.598 3.977 4.356


— End of Tab 4 —

Notes


Section 179 Expensing

expensinG assets unDer CoDe seCtion 179

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 dif-ferent than the rules for special (bonus) depreciation (if extended), 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 ex-pense 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 1-7.

annual DeDuCtion limit

The total cost of property that can be ex-pensed 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 quali-fying 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.U Caution: The Section 179 expense for certain heavy passenger vehicles is limited to $25,000 per vehicle [IRC §179(b)(5)]. See Section 179 Limit for Heavy Vehicles on Page 6-7.If Section 179 property is placed in ser-vice 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, 2015, and has a December 31 year-end. On December 10, 2015, Lasso placed in service a machine acquired that day for $500,000. No other depreciable assets were placed in service during that year. If Lasso so desires, the entire $500,000 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.

Section 179 Annual LimitsTax Year

Beginning In Maximum Deduction

Qualifying Property Threshold

2005..................................... $ 105,000 .......................... $ 420,0002006........................................ 108,000 .............................. 430,0002007........................................ 125,000 .............................. 500,0002008–2009.............................. 250,000 .............................. 800,000

2010–or later ......................... 500,000 ............................ 2,000,000 2015 or later ............................. 25,0001 ............................ 200,0001

1 The Section 179 limits have been scheduled to fall to these levels in the past and Congress has raised them. Be alert for developments.

Example: In 2015, Chris placed in service machinery costing $2,102,000. This cost is $102,000 more than $2,000,000, so he must reduce his Section 179 annual deduction limit to $398,000 ($500,000 − $102,000).

Joint returns. A legally married couple, 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 ad-ditions 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); Rev. Rul. 2013-17]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 §179(b)(4)(A)]Controlled group. When a corporation is a member of a controlled group (greater than 50% ownership), the annual dollar and qualify-ing 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.

Tab 5 TopicsExpensing Assets Under Code Section 179 ........... Page 5-1Annual Deduction Limit ........................................... Page 5-1Increased Limits for Targeted Areas ....................... Page 5-2Business Taxable Income Limit ............................... Page 5-3Pass-Through Entities............................................. Page 5-4Qualifying Property ................................................. Page 5-6Comparing Special Depreciation and

Section 179 Expensing ......................................... Page 5-8Making the Section 179 Election............................. Page 5-9Section 179 Recapture ........................................... Page 5-9State Conformity to Federal Special (Bonus)

Depreciation and Section 179 Expensing Rules .................................................................. Page 5-10

Note: After 2015, these amounts will be indexed for inflation.


inCreaseD limits for tarGeteD areas

Enterprise Zone Businesses (Pre-2015) Expired Provision Alert: For assets placed in service before 2015, 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 2014 unless legislation is enacted to extend it. This discussion is included in the event the increased limits are extended to 2015.An enterprise zone business (defined in Code Section 1397C) that places qualified zone property in service in an empowerment zone before 2015 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 empower-

ment 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 con-sidered satisfied if the taxpayer substantially renovates the prop-erty. 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 tax-payer’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 quali-fied 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 below) 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 prop-erty 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 Janu-ary 2, 2009. John Smith placed property that qualified for Section 179 expens-ing 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 AreasRenewal 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 previous 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 ExpensingIf any qualified disaster assistance property placed in service dur-ing 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:•Qualifiedzonepropertythatceasestobeusedinanempower-

ment zone by an enterprise business. [IRC §1397A(b)]•Qualifiedrenewalpropertythatceasestobeusedbyarenewal

community business in a renewal community. [IRC §1400J(a)]•LibertyZonepropertythatceasestobeusedintheNewYork

Liberty Zone. [IRC §1400L(f)(3)]•GOZoneproperty thatceasestobeGOZoneproperty. [IRC

§1400N(e)(4)]•Qualifiedrecoveryassistancepropertythatceasestoberecovery

assistance property. [P.L. 110-246, Sec. 15345(d)(2)]

2017


N Observation: To qualify for the additional Section 179 expens-ing 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 No-tice 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 ap-ply to other property that had qualified for additional Section 179 expensing in an earlier year.

business taxable inCome limitThe 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)]•Businessincomeorlossgeneratedbypartnerships,corporations

and LLCs.•Wages,salaries,tipsandothercompensation.•ApartnerorScorporationshareholder’spass-

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.

•IncomeorlossfromScheduleCandScheduleF.•Section1231gains(orlosses)fromatradeorbusiness.•Section1245and1250depreciationrecapturefromatradeor

business.•Interestearnedfromworkingcapitalrelatedtoatradeorbusi-

ness.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.•Specialdeductions,suchasthedividendreceiveddeduction(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 tax-able 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 high-level 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 review-ing 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 2015, 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 2015. 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 2015 before considering any Section 179 deduction. He also reports $65,000 of wages and $3,000 of Section 1245 depreciation recap-ture 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 2015 (assuming total qualifying property does not exceed $2,000,000) for Section 179 property placed in service for his Schedule C activity.

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 2015. Bo reports a $13,000 business loss from his proprietorship; their ag-gregate 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 $500,000 limit) of Section 179 expense in 2015 assuming total qualifying property additions do not exceed $2,000,000.

Controlled Groups 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 refer-ence to Code Section 1563(a), but using a more-than-50% (instead of an at least 80%) stock ownership test when determining parent-subsidiary status [IRC §179(d)(7)]. When determining brother-sister status, both the 80% test and the more-than-50% test apply.

Example: Corporations P, Q, R and S are component members of a controlled group for Section 179 purposes. The corporations collectively purchased $2,200,000 of qualifying Section 179 property in 2015. The group’s maximum Section 179 deduction for 2015 is $300,000 ($500,000 maximum minus $200,000 excess over the $2,000,000 qualifying property threshold).

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 al-located to any member cannot exceed the cost of Section 179 property actually purchased and placed in service by that member [Reg. §1.179-2(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 bind-ing 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 LimitUse one of the methods shown below when the Section 179 deduction is reduced by the busi-ness 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 (if available) 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 CostN = 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, 2015, 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 = < $3,375>

1 – 5 <4> Business taxable income before depreciation and Section 179 expense .................................................. $ 23,700 Section 179 deduction ....................................................... < 3,375 > MACRS depreciation ($105,000 – $3,375) × 20.00% .......................................... < 20,325 > Net taxable income ............................................................ $ 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.

Example: Using Method #2 for the preceding example, Section 179 election is made for the entire $105,000 of the basis of the asset placed in service. Only $23,700 is deductible in 2015. The remaining $81,300 ($105,000 – $23,700) carries over and may be deductible as a Section 179 expense in 2016, subject to the business taxable income limit and the annual deduction limit.

CarryoversAny 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 de-duction 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 al-lowed 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 deduc-tion 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.


Annual Deduction and Qualifying Property LimitsThe annual deduction limit applies at both the pass-through entity level and the owner level. In other words, for tax years begin-ning in 2015, 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 pass-through entities could be allocated Section 179 deductions that ex-ceed 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 LimitThe amount of Section 179 expense that can be allocated by a pass-through entity to its owners cannot exceed the entity’s ag-gregate 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 2015, 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 2015, Winston’s taxable income (before any Section 179 deduction) de-rived from the active conduct of its restaurant business is $6,000. Therefore, Winston can pass through only $6,000 of Section 179 expense to its partners in 2015. 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 2016, 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 2015 to its partners in 2016.

Pass-through entity's taxable income. Business taxable income for pass-through entities is computed the same way as for all tax-payers (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 2015. Kayco paid its sole shareholder, Kay, $80,000 in salary during 2015. 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 ................................................. $ <65,000>Employee/shareholder wages .............................................. 80,000Business taxable income limit .............................................. $ 15,000

Kayco can elect expensing up to $500,000 for 2015, 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 2015, 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 $28,500 of its taxable income to Dean, a partner. Dean is also a partner in Jethro Partner-ship, 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 $55,000 of his sole proprietorship’s Section 179 costs, for a total of $94,500. His deduc-tion of $25,000 does not exceed his business taxable income of $33,500 ($28,500 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 2016.

Basis AdjustmentsThe pass-through entity reduces its basis in as-sets 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 2015, 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 2015, 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, 2016, 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.

$500,000

is limited to his business tax-able income of $53,500

He carries over $41,000 ($94,500 - $53,500) of the elected Section 179

costs to 2016.


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 carry-over cannot be carried from a C corporation year to an S corpora-tion 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 ShareholdersWhile 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 con-sider the election when other partners or shareholders will benefit.Depreciable personal property additions allocable to trust and es-tate 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 propertyTo qualify for the Section 179 deduction, property (new or used) must be all of the following:•Eligibleproperty(seeEligible Property in the next column).•Usedmorethan50%inanactivetradeorbusinessintheyear

placed in service.•Acquiredbypurchasefromanunrelatedparty.Related persons. For this test, related persons include: 1) An individual and his family members (including only

a spouse, ancestors and lineal descendants). 2) A corporation and an individual who owns (directly or

indirectly) more than 50% of the value of the corpora-tion’s stock.

3) Two corporations that are members of the same con-trolled 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 quali-fies 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 2015. 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 2015 and 80% for business in 2016. 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) pur-chased 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 PropertyTo 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:•Anintegralpartofmanufacturing,productionorextractionor

of furnishing transportation, communications, electricity, gas, water or sewage disposal services or

•A researchorbulkstorage facilityused inconnectionwithsuch 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 2015).

6) Qualified real property placed in service in a tax year beginning in 2010–2014. 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: •Machineryandequipment.•Propertycontainedinorattachedtoabuilding(otherthanstruc-

tural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment and signs.

•Gasolinestoragetanksandpumpsatretailservicestations.•Livestock,includinghorses,cattle,hogs,sheep,goats,minkand

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 de-duction 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

after 2009


cultivating the soil, raising livestock and mining minerals. Eligible property in this category includes property used as an integral part of the:•Extraction,processing, or refiningofmetallic andnonmetallic

minerals, such as oil, gas, rock, marble or slate. •Constructionofroads,bridgesorhousing.•Processingofmeat,fishorotherfoodstuffs.•Cultivationoforchards,gardensornurseries.•Operationofsawmills,theproductionoflumber,lumberproducts

or other building materials.•Fabricationortreatmentoftextiles,paper,leathergoodsorglass.•Rebuilding,asdistinguishedfromthemererepairing,ofmachinery.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.2

• 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.1 Not an exhaustive list.2 Placed in service in a tax year beginning in 2003–2014.3 Placed in service in a tax year beginning in 2010–2014.

Ineligible PropertySection 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 LodgingA 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 ex-ample, 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 connec-tion 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 prop-erty cannot claim Section 179 deductions for property used in con-nection 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 Description

Assets used in nonlodging commercial facilities

Facilities (for example, restaurants, drug stores, grocery stores, vending machines and coin-operated washers and dryers) available equally to tenants and nontenants.

Assets used in hotel/motel More than 50% of the establishment’s living quarters are used during the year by transients (rental period normally less than 30 days).

Certified historic structure The portion of the basis that is attributable to qualified rehabilitation expenditures.

Energy property 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 PropertyFor noncorporate taxpayers, property leased to others is not eligible for Section 179 expense, unless:1) The taxpayer manufactures (or produces) the property or2) The taxpayer purchases the property to lease to others and

both the following tests are met:•Thetermofthelease(includingoptionstorenew)islessthan

50% of the property's class life.•Forthefirst12monthsafterthepropertyistransferredtothe

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.


Qualified Real Property Expired Provision Alert: Qualified real property placed in service in tax years beginning in 2010–2014 was eligible for Section 179 expensing. This provision is not available for property placed in service in tax years beginning after 2014 unless legislation is enacted to extend it. This discussion is included in the event the provision is extended to tax years beginning in 2015.For tax years beginning in 2010–2014, 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.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 2015 [IRC §179(f)(4)(A)]. Any carryforward remaining at the end of the taxpayer’s last tax year beginning in 2015 is treated as placed in service in that last 2015 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 2015 [generally a tax year beginning in 2010–2014, but also a tax year beginning in 2015 that is not the taxpayer’s last tax year beginning in 2015 (where the taxpayer has more than one tax year beginning in 2015—short tax year situations)], it is treated as placed in service on the first day of the taxpayer’s last tax year beginning in 2015 [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 2015, 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 2015 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 2015 (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 consider-ing 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 deduc-tion for qualified real property was originally effective for tax years beginning in 2010 and 2011, and then later extended to tax years beginning in 2012–2014. 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 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 2012–2014. 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 and IRS Guidance on TIPA Extension Provisions on Page 2-17 for additional guidance and procedural requirements.)

Example: In 2014, 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 2014 was limited to $60,000 (under the business taxable income limit). JaneCo’s Section 179 carryforward from 2014 is $15,000 ($75,000 – $60,000), which consists of:

Personal Property ............. $15,000 × 50,000 ÷ 75,000 .............$10,000Qualified Real Property ...... $15,000 × 25,000 ÷ 75,000 .............$ 5,000

JaneCo carries over the $15,000 disallowed Section 179 expense to 2015. However, in 2015, JaneCo’s business taxable income limit is zero. The $5,000 carryforward related to qualified real property cannot be carried over to 2016. Instead, it is treated as real property placed in service on January 1, 2015. The remaining $10,000 is carried forward to 2016.

ComparinG speCial DepreCiation anD seCtion 179 expensinG

Expired Provision Alert: For qualified assets placed in service before 2015, 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 2014 unless legislation is enacted to extend it. This discus-sion is included in the event that special depreciation is extended to 2015.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-2015)

Requirement Section 179 Deduction

Special Depreciation Allowance

Must be placed in service between certain dates? No YesCan property be used in a rental activity? No YesMust be new property? No Yes1

Annual limit (in addition to Section 280F limits that apply to passenger autos) on amount?

Yes2 No

Can be acquired from a related party? No YesDoes property qualify if used 50% or less for business?

No Yes3

Recapture required if business use of property falls to 50% or less?

Yes No4

Do qualified leasehold improvements qualify? Yes5 YesDoes qualified restaurant property qualify? Yes5 No6

Do qualified retail improvements qualify? Yes5 No6

1 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 If placed in service in a tax year beginning in 2010–2014.6 Exception: If property also meets the definition of qualified leasehold

improvements, it qualifies for special depreciation allowance.

2015

2015

2015

2015after 2009


If an asset qualifies for both the special depreciation allowance and Section 179 expensing, consider the following:•Whendeterminingwhetherthemid-quarterconventionapplies,

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.

•Theelectionoutofspecialdepreciationappliestoanentireclass of property placed in service during the tax year. The Section 179 election is made on an asset-by-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)]•Theoriginalreturnfiledforthetaxyearthe

property was placed in service (whether or not timely filed) or

•Atimelyfiledamendedreturn.Ifmadeonanamended 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 ElectionTax years beginning after 2002 and before 2015. The Section 179 expensing election (and the selection of the property ex-pensed) 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 re-instated; 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 begin-ning after 2002 and before 2015.For tax years beginning in 2015 and later, the election cannot be revoked without IRS consent, unless Congress enacts legislation extending the prior rule. [IRC §179(c)(2)] 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 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:•Personaluseor•Usefortheproductionofincome(forexample,investmentuse).

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 recap-ture 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, 2014, 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, 2015, Sal purchased new video equipment for use in his business and converted the equipment purchased in 2014 to personal use property.The recapture is calculated as follows: Section 179 deduction claimed (2014) ............................................ $10,000 Minus: Allowable depreciation (instead of Section 179 expensing) 2014 ($10,000 × 100% business use × 20%) ........... $ 2,000 2015 [$10,000 × 100% business use × 32% × 50% (half-year convention)] ........................ 1,600 < 3,600> 2015—Recapture amount ............................................................... $ 6,400

Note: Basis in the equipment purchased in 2014 is increased by the $6,400 of recapture income.

Where to ReportWhen 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 AreasTaxpayers 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 ex-pensing amount must be recaptured. See Recapture of Additional Expensing on Page 5-2.


Vehicles and Listed Property

Business Vehicles—Quick FactsFor business vehicles placed in service 2015 2014 2013 2012 2011 2010

Passenger Autos—Unloaded Gross Vehicle Weight 6,000 lbs. or LessDepreciation limits (Section 280F limits)1,2,3

Placed in service year if special depreciation allowed $ 11,160 $ 11,160 $ 11,160 $ 11,160 $ 11,060 $ 11,060 Placed in service year if no special depreciation allowed 3,160 3,160 3,160 3,160 3,060 3,060 Second-year limit 5,100 5,100 5,100 5,100 4,900 4,900 Third-year limit 3,050 3,050 3,050 3,050 2,950 2,950 All years thereafter 1,875 1,875 1,875 1,875 1,775 1,775Leased auto income inclusion applies when FMV exceeds 17,500 18,500 19,000 18,500 18,500 18,500

Trucks and Vans—Loaded Gross Vehicle Weight 6,000 lbs. or LessDepreciation limits (Section 280F limits)1,2,3

Placed in service year if special depreciation allowed $ 11,460 $ 11,460 $ 11,360 $ 11,360 $ 11,260 $ 11,160 Placed in service year if no special depreciation allowed 3,460 3,460 3,360 3,360 3,260 3,160 Second-year limit 5,600 5,500 5,400 5,300 5,200 5,100 Third-year limit 3,350 3,350 3,250 3,150 3,150 3,050 All years thereafter 1,975 1,975 1,975 1,875 1,875 1,875Leased auto income inclusion applies when FMV exceeds 18,500 19,000 19,000 19,000 19,000 19,000

Vehicles Not Subject to Depreciation LimitsAutos 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 lessSection 179 expensing limit—per vehicle4 $ 25,000 $ 25,000 $ 25,000 $ 25,000 $ 25,000 $ 25,000Depreciation limit (Section 280F limit) N/A N/A N/A N/A N/A N/A

Standard Mileage Rates

Business miles 57.5¢ 56¢ 56.5¢ 55.5¢51¢: 1/1–6/30

55.5¢: 7/1-12/31

50¢

Depreciation component of business standard mileage rate 24¢ 22¢ 23¢ 23¢ 22¢ 23¢Charitable miles 14¢ 14¢ 14¢ 14¢ 14¢ 14¢

Medical or moving miles 23¢ 23.5¢ 24¢ 23¢19¢: 1/1–6/30

23.5¢: 7/1–12/31

16.5¢

Section 280F Limit Applies When(Vehicles Placed in Service in 2015)

1 If any personal use, the limits must be reduced to reflect actual business/investment-use percentage.

2 The limits are not reduced if the vehicle is used for less than a full year, but are reduced for a short tax year. See Computing Depreciation in a Short Tax Year on Page 2-11.

3 This limit applies to the sum of any special depreciation allowance (if available), MACRS depreciation and Section 179 expense claimed.

4 Overall limit on Section 179 expensing also applies.5 Assumes half-year convention applies.6 The special depreciation allowance is not available for business

vehicles placed in service after 2014 unless legislation is enacted that extends the provision.

DescriptionBasis equals or exceeds5

Auto Truck or Van

Qualifies for 50% special depreciation $ 18,600 $ 19,100

Doesn’t qualify for special depreciation $ 15,800 $ 17,300

Tab 6 TopicsBusiness Vehicles—Quick Facts ............................ Page 6-1Special Rules for Listed Property............................ Page 6-2Business Use Requirement for Listed Property ...... Page 6-3Lessee’s Income Inclusion Amount—Listed

Property Other Than Autos ................................... Page 6-4Limits on Vehicle Depreciation ................................ Page 6-5Special Depreciation and the Section 280F Limit ... Page 6-6Section 179 Expensing Rules ................................. Page 6-7Standard Mileage Rates vs. Actual Costs ............... Page 6-8

Leased Vehicles ...................................................... Page 6-9Alternative Motor Vehicle Credit............................ Page 6-10Credits for Plug-In Vehicles................................... Page 6-11Lease Income Inclusion Tables A & B—Property

Other Than Passenger Automobiles ................... Page 6-12Lease Income Inclusion Table—Electric Autos ..... Page 6-12Lease Income Inclusion Tables—Passenger

Autos Leased in 2015 and 2014 ......................... Page 6-13Lease Income Inclusion Tables—Passenger

Autos Leased in 2013 and 2012 ......................... Page 6-14


Recordkeeping RequirementsRecordkeeping is required to substantiate the business use of listed property. Taxpayers cannot take any depreciation, Section 179, or other deduction or credit for listed property unless they can prove the business/investment use with adequate records or with suf-ficient evidence to support their own statements. [IRC §274(d)(4)]The records or other documentary evidence must support all the following: •Theamountofeachseparateexpenditure,suchasthecostof

acquiring the item, maintenance and repair costs, capital improve-ment costs, lease payments and any other expenses.

•Theamountofeachbusinessandinvestmentuse(basedonanappropriate measure, such as mileage for vehicles and time for other listed property), and the total use of the property for the tax year.

•Thedateoftheexpenditureoruse.•Thebusinessorinvestmentpurposefortheexpenditureoruse.

Reporting Listed PropertyTaxpayers must provide information about listed property in Part V of Form 4562, if claiming either of the following deductions:•Anydeductionforavehicle.•Adepreciationdeductionforanyotherlistedproperty.Part V, Section B does not need to be completed for vehicles used by employees who are not more-than-5% owners or related persons if at least one of the following requirements is met:1) The employer maintains a written policy statement that prohibits

either:a) All personal use including commuting orb) Personal use, other than commuting, by employees who are

not officers, directors or one-percent-or-more owners.2) All vehicle use by employees is treated as personal use.3) More than five vehicles are provided for use by employees;

the employees provide the employer with information on their vehicle use, and the employer retains this information.

4) For demonstrator automobiles provided to full-time auto deal-ership salespersons, a written policy statement is maintained that limits the total mileage outside the salesperson’s normal working hours and prohibits use of the automobile by anyone else, for vacation trips or to store personal possessions.

Employees and self-employed individuals. If a Form 2106 or 2106-EZ is filed, taxpayers report information about listed property on that form and not on Form 4562. Also, if a Schedule C or C-EZ (Form 1040) is filed and the standard mileage rate or actual vehicle expenses (except depreciation) are claimed and Form 4562 is not required to be filed for any other reason, taxpayers report vehicle information in Part IV of Schedule C or Part III of Schedule C-EZ and not on Form 4562.

business use reQuirement for listeD property

For listed property not used predominantly (more that 50%) for qualified business use, the following rules apply: [IRC §280F(b)]1) No Section 179 deduction can be claimed. [IRC §280F(d)(1)]2) No special (bonus) depreciation, if available, can be claimed.3) Depreciation must be computed using the straight-line (SL)

method over the ADS recovery period. 4) If qualified business use starts out at over 50% but later falls

to 50% or less, excess depreciation and Section 179 expense must be recaptured.

5) For listed property other than passenger automobiles, a lessee must add an income inclusion amount in the first year the leased property fails the more than 50% qualified business use test.

See Lessee's Income Inclusion Amount—Listed Property Other Than Autos on Page 6-4. Note: Being required to use the SL method for an item of listed property used 50% or less for qualified business use does not require the taxpayer to use the SL method for other property in the same class as the listed property. [Temp. Reg. §1.280F-3T(c)(3)] Exception for leased property. The business-use requirement generally does not apply to listed property leased or held for leasing by a taxpayer regularly engaged (that is, frequently and continuously) in the business of leasing listed property. Occasional or incidental leasing activity is insufficient. Employers who allow employees to use their property for personal purposes and charge the employees for the use are not regularly engaged in the busi-ness of leasing. [Temp. Reg. §1.280F-5T]

Qualified Business UseQualified business use of listed property is any use of the property in a trade or business except: [Reg. §1.280F-6(d)(2)(ii)] •Leasing theproperty toa5%owneror relatedperson [if the

property is used by an individual who is (1) a 5% owner or (2) related to the property’s owner or lessee].

•Useofpropertyascompensationofa5%ownerorrelatedperson.•Useofpropertyascompensationofanyperson(otherthana5%

owner or related person), unless the value of the use is included in that person’s income and income tax is withheld on that amount where required.

Example: Frank owns a business that employs his brother, John. As part of his compensation, John is allowed to use a company car for personal use. Frank includes the value of the personal use in John’s income and properly withholds tax. John’s use of the company car is not qualified business use because Frank and John are related parties. Variation #1: Frank allows unrelated employees to use company cars as part of their compensation. Frank does not include the value of these cars in the employees’ gross income or withhold taxes on the value of their use. This use of the company cars by employees is not qualified business use. Variation #2: Same as Variation #1, except that Frank reports the FMV of the employees’ personal use of the cars as income to the employees and with-holds tax on the income. The employees’ use of the cars, even for personal purposes, is a qualified business use for Frank’s business.

5% owner. For a business entity that is not a corporation, a 5% owner is any person who owns more than 5% of the capital or profits interest in the business. For a corporation, a 5% owner is any person who owns, or is considered to own, either (1) more than 5% of the corporation’s outstanding stock or (2) stock pos-sessing more than 5% of the total combined voting power of all stock in the corporation. Related persons. For this purpose, related persons are defined at Code Section 267(b). They include: •An individualandmembersofhis family, includingaspouse,

child, parent, brother, sister, half-brother, half-sister, ancestor and lineal descendant. Note: Legally married same-sex individuals are considered

spouses for purposes of this rule. However, individuals in a registered domestic partnership, civil union or similar formal relationship recognized under state law, but not denominated as a marriage under the laws of that state, are not considered spouses for purposes of this or other federal tax rules.

•Individualsandmore-than-50%ownedbusinessentities.•Businessentitiesownedmorethan50%bythesamepersons.Special rules for aircraft. The leasing of any aircraft by a 5% owner or related person, or the compensatory use of any aircraft, counts as qualified business use if at least 25% of the aircraft’s total use during the year is for other types of qualified business use. [Reg. §1.280F-6(d)]


æ Practice Tip: Property does not stop being used predominantly for qualified business use because of a transfer at death. [Reg. §1.280F-6(d)(4)]

Investment UseUse of property to produce income in a nonbusiness (investment) activity is not qualified business use. Therefore, the investment use percentage is not considered when determining if listed property is used predominantly (more than 50%) in business in order to qualify for a Section 179 deduction and accelerated depreciation under MACRS. However, the combined business/investment use percentage is used to compute the depreciable basis and to prorate the Section 280F annual depreciation limits on certain vehicles.

Example: Sarah Bradley uses her home computer 50% of the time to manage her investments. She also uses it 40% of the time in her part-time business. Sarah does not use any portion of her home regularly and exclusively for business, so her home computer is listed property because it is not used at a regular business establishment. Her business use of the computer is 40% so it is not used predominantly for qualified business use. Therefore, she can-not elect Section 179 expensing or a special depreciation allowance for the computer. She must depreciate it using the straight-line method over the ADS recovery period (five years). However, she can use her combined business/investment use percentage (90%) for determining her depreciation deduction.

Recapturing Excess Depreciation (Listed Property)Listed property must be used more than 50% in a trade or business in the year it is placed in service to qualify for accelerated or special (bonus) (if available) depreciation and/or a Section 179 deduction. In addition, during any year that business use falls to 50% or less, excess depreciation must be recaptured. [IRC §280F(b)] Note: The property’s basis is increased by the amount of depreciation recaptured.Excess depreciation is: [Reg. §1.280F-3T(d)(2)]1) The depreciation allowable for the property (including any

Section 179 deduction and special depreciation allowance) for years before the year its business use fell to 50% or less, minus

2) The depreciation that would have been allowable for those years if the property had not been used more than 50% for business in the year it was placed in service.

To determine the amount in item 2 above, depreciation is refigured using the straight-line method and the ADS recovery period (five years for autos). See ADS Recovery Periods on Page 2-2 for ADS recovery periods for other assets.

Example: In June 2011, Ellen Rye purchased and placed in service a pickup truck that cost $18,000. She used it only for qualified business use from 2011 through 2014. Ellen claimed a Section 179 deduction of $10,000 when she purchased the truck and depreciated the remaining cost using the 200% DB method over a five-year recovery period. (The pickup truck’s GVW was over 6,000 pounds, so it was not subject to the Section 280F depreciation limits.) During 2015 she used the truck 50% for business and 50% for personal pur-poses. Ellen must include $4,018 excess depreciation in her gross income for 2015, determined as follows:Total Section 179 deduction ($10,000) and depreciation claimed ($6,618) for 2011 through 2014 ......................................................... $ 16,618Minus depreciation allowable:

2011 – 10% × $18,000 .............................................. $ 1,8002012 – 20% × $18,000 .............................................. 3,6002013 – 20% × $18,000 .............................................. 3,6002014 – 20% × $18,000 .............................................. 3,600 < 12,600>

Excess depreciation .......................................................................... $ 4,018

N Observation: Section 179 deductions are recaptured for all property, not just listed property, when business use falls to 50% or less. See Section 179 Recapture on Page 5-9.Where to report recapture. Form 4797, Part IV, column (b), is used to report Section 280F(b)(2) recapture. The recapture amount is reported as other income on the same form or schedule on which the depreciation deduction was taken. For example, the recapture amount is reported as other income on Schedule C (subject to SE tax) if the depreciation deduction was taken on Schedule C. If the depreciation deduction was taken on Form 2106, the recapture amount is reported as other income on page 1 of Form 1040. Note: If the property was used in both the taxpayer’s trade or business and for the production of income, the portion of the recapture amount attributable to the trade or business is subject to self-employment tax. The recapture income should be allocated to the appropriate schedules (for example, Schedules C and E, if the property was used partly in a trade or business and partly in a rental activity).

lessee’s inCome inClusion amount—listeD property other

than autosTaxpayers who lease listed property (other than passenger auto-mobiles) for business/investment use must include an amount in their income in the first year their qualified business-use percent-age is 50% or less. Note: When passenger automobiles are leased for business use, taxpayers may be subject to an annual income inclusion amount. See Income Inclusion Rules on Page 6-9. Some heavy passenger vehicles are not passenger automobiles because their GVW exceeds 6,000 pounds. (See Passenger Automobiles on Page 6-5). So, if they are leased, they are not subject to the annual income inclusion amount. But, they are still listed property, so if they are leased and their qualified business use is 50% or less, the one-time income inclusion described in this section will apply. The inclusion amount is the sum of Amounts A and B, calculated using the table below. The inclusion amount cannot exceed the sum of all deductions for rent for the listed property for the year the inclusion amount applies. [Temp. Reg. §1.280F-5T(g)]

Inclusion Amount Worksheet for Leased Listed Property(Other Than Passenger Autos)

1) FMV of the property on the first day of the lease term.1 ......... 1) 2) Business/investment use for first year business use is

50% or less. ........................................................................... 2) 3) Multiply line 1 by line 2. .......................................................... 3) 4) Rate (%) from Table A on Page 6-12. ..................................... 4)

5) Multiply line 3 by line 4. This is Amount A. ............................. 5) 6) FMV of the property on the first day of the lease term.1 ......... 6) 7) Average business/investment use for years property was

leased before the first year business use is 50% or less. ...... 7) 8) Multiply line 6 by line 7. .......................................................... 8) 9) Rate (%) from Table B on Page 6-12. .................................... 9)

10) Multiply line 8 by line 9. This is Amount B. ............................. 10) 11) Add line 5 and line 10. This is the inclusion amount.

Enter as other income on the form or schedule on which the deduction was originally taken. ........................................ 11)

1 If the capitalized cost of an item of listed property is specified in the lease agreement, that amount is the FMV. [Temp. Reg. §1.280F-5T(h)(2)]


2) A vehicle used directly in the trade or business of transporting persons or property for pay or hire (for example, a taxi).

3) A qualified nonpersonal use vehicle (see Qualified nonpersonal use vehicles on Page 6-2).

N Observation: The term passenger automobile is misleading, since it also includes trucks and vans if their loaded GVW is 6,000 pounds or less.

æ Practice Tip: By definition, passenger automobiles are listed property. See Special Rules for Listed Property on Page 6-2.Other vehicles. Certain vehicles are outside the passenger auto-mobile definition because their GVW is more than 6,000 pounds or they are used to transport persons or property for pay or hire. While these vehicles are not subject to Section 280F depreciation limits, they are still listed property and are subject to the listed property rules other than the depreciation limits on passenger automobiles.U Caution: Many vehicles that are not subject to the Section 280F depreciation limit because they fall outside the definition of a passenger automobile are subject to a $25,000 limit on Section 179 expensing. See Section 179 Limit for Heavy Vehicles on Page 6-8.

Deduction Limits for Vehicles Placed in Service in 2015

Description§280F

Depreciation Limit1

Maximum §179

DeductionCar—GVW (unloaded) up to 6,000 lbs. $ 3,1602 $ 3,1602

Truck or van—GVW (loaded) up to 6,000 lbs. $ 3,4602 $ 3,4602

• Car—GVW (unloaded) over 6,000 lbs. but GVW not over 14,000 lbs. N/A $ 25,0003

• 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, 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).

N/A $ 500,0004

Truck or van—GVW (loaded) over 14,000 lbs. N/A $ 500,0004

1 First year limit; reduce by any Section 179 expense claimed.2 The special (bonus) depreciation allowance is not available for business vehicles

placed in service after 2014 unless legislation is enacted that extends the provision.3 Per vehicle limit. Also subject to annual overall limit ($500,000 for 2015).4 Annual limit for all assets expensed. In the past, this limit has been increased.

Tax professionals should watch for developments.

Depreciating Vehicles Acquired in a TradeSee Depreciating Vehicles Received in a Trade on Page 9-8.

Depreciation After Recovery Period EndsWhen 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. Un-recovered 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 2009, 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 re-covery period (2009 through 2014). His depreciation deductions are as follows:

Year MACRS Depreciation Percentage

MACRS Depreciation

Amount

Section 280F Limit

Depreciation Allowed

2009...................20% ...................$ 6,300 ...........$ 2,960 ..............$ 2,9602010 .................. 32 ........................10,080 ...............4,800 ..................4,8002011 ............... 19.2 ..........................6,048 ...............2,850 ..................2,8502012 ............. 11.52 ..........................3,629 ...............1,775 ..................1,7752013 ............. 11.52 ..........................3,629 ...............1,775 ..................1,7752014................ 5.76 ........................ 1,814 ...............1,775 ................ 1,775Total ..............................................$31,500 .......................................$15,935

At the end of 2014, Jim’s unrecovered basis in the car is $15,565 ($31,500 – $15,935). If in 2015 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 2014, 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 2015 would still be $15,565 ($31,500 – $15,935).If his business use remained at 60%, Jim’s depreciation expense for 2015 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 be-cause 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 depre-ciation 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

Plus $8,000 if vehicle qualifies for special (bonus) depreciation.


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 depre-ciation 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%) .......... $12,000Actual 2011 depreciation ...................................................................... < 11,060>Unrecovered basis .................................................................................$ 940

The $940 unrecovered basis is recovered beginning in 2017, subject to the 280F limit then in effect.For 2015, 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 2015.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%) ........... $ 11,040Actual 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% de-clining balance method (assuming the half-year convention applies) as follows:

Beginning unadjusted basis ...................................................................$18,400 Less: 2011 actual depreciation ............................................................< 11,060>2012, 2013 and 2014 actual depreciation ($2,936 + $1,762 + $1,057)1 .... < 5,755>

Adjusted basis at 12/31/14 .................................................................. $ 1,585 200% declining balance rate ................................................................ × 40%2015 depreciation ...................................................................................$ 634

Because this amount is less than the 280F depreciation limit ($1,775) Matt deducts $634 as depreciation for 2015.1 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 and 2014 depreciation 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 VehiclesCertain 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 in the pre-vious column 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 ($25,000 for 2015).N Observation: For 2015, the Section 179 per-vehicle expens-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 2015 on Page 6-6 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.

Example: Fred was considering the purchase of a full-sized Ford F150 pickup truck in 2015 (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 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 2014 when the annual overall Section 179 deduction limit was $500,000. For 2015, the Section 179 annual overall deduction limit is $25,000.

Section 179 Expense for Listed PropertyThe 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.

Using Section 179 Expense to Reach the Section 280F LimitWhen a vehicle’s first year depreciation expense is less than the Section 280F limit, electing a Section 179 deduction for the ve-hicle (assuming the vehicle is eligible) can maximize the first year deductions (up to the 280F limit—for 2015, $3,160 for autos and $3,460 for trucks and vans).

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.

Formula to Optimize First-Year Expense on a Vehicle

Section 179 Deduction =

[(Section 280F Limit × Combined Business/Investment Use Percentage)] – [(First-Year

Depreciation Rate1) × (Combined Business/Investment

Use Percentage) × (Asset Cost)]

1 – (First-Year Depreciation Rate1)1 See First-Year MACRS Depreciation Rates for Vehicles on Page 6-8.

$500,000

$11,160$11,460

if special depreciation applies; $3,160 and $3,460, respectively, if it does not apply.


Example #1: Mark purchases a used car in 2015 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:

$825 = ($3,160 × 100%) – (20% × 100% × $12,500) 80%

Total Depreciation for 2015 (Proof):Section 179 deduction ..................................................................... $ 825MACRS depreciation ($12,500 – $825) × 20% ............................... 2,335Total 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 2015 (Proof):Section 179 deduction ...................................................................... $ 619MACRS depreciation [($12,500 × 75%) – 619] × 20% ..................... 1,751Total depreciation (including Section 179 deduction) ....................... $ 2,370

First-Year MACRS Depreciation Rates for Vehicles

Applicable Convention50% Special Depreciation Allowance 1

No Special Depreciation Allowance

Straight-Line

Method 2 HY 60.0% 20% 10.0%MQ (placed in service in 1st quarter) 67.5 35 17.5MQ (placed in service in 2nd quarter) 62.5 25 12.5MQ (placed in service in 3rd quarter) 57.5 15 7.5MQ (placed in service in 4th quarter) 52.5 5 2.51 The 50% special depreciation allowance is generally not available for 2015 unless

legislation is enacted that extends the provision.2 Required when business use is 50% or less.

stanDarD mileaGe rates vs. aCtual Costs

See Comparison of Standard Mileage Rate and Actual Cost Methods (2015) on Page 6-10 for an overview of the methods.

Standard Mileage Rate MethodOwned 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 as-sumed while using the standard mileage method. Note: The standard mileage rate is available for autos used for hire, such as taxicabs. (Rev. Proc. 2010-51)Adjustment to basis. For 2015, 24¢ is the deemed depreciation rate for each mile claimed under the standard mileage rate. (Notice 2014-79) Note: The vehicle’s basis cannot be reduced below zero. When the basis of a vehicle is depreci-ated 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, 2014, for $18,000. He drove 9,000 and 20,000 business miles during 2014 and 2015, which represented 80% business use. On December 24, 2015, Bob sells the car.

Calculating Vehicle Depreciation and Section 179 DeductionThe following worksheet calculates depreciation for a passenger auto placed in service in 2015 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.

Used Ford New Chevy New Audi 1) Business use percentage. 55% 55% 40% 2) Investment use percentage. 20% 20% 0% 3) Business/investment use percentage. 75% 75% 40% 4) Cost or other basis of vehicle. $ 12,000 $ 12,000 $ 34,000 5) Depreciation method. 200% DB 200% DB SL 6) Depreciation rate (see First-Year MACRS Depreciation Rates for Vehicles above). 20% 60% 10% 7) Section 280F depreciation limit (see Business Vehicles—Quick Facts on Page 6-1). $ 3,160 $ 11,160 $ 3,160 8) Maximum depreciation deduction. Multiply line 7 by line 3. 2,370 8,370 1,264 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. 713 7,425 0

10) Business/investment cost. Multiply line 4 by line 3. 9,000 9,000 13,600 11) Section 179 deduction claimed in the year vehicle placed in service. 713 7,425 0 12) Tentative basis for depreciation. Subtract line 11 from line 10. 8,287 1,575 13,600 13) Maximum regular depreciation allowed. Subtract line 9 from line 8. 1,657 945 1,264 14) Tentative MACRS depreciation deduction. Multiply line 12 by line 6. 1,657 945 1,360 15) Enter lesser of the amount on line 13 or 14. 1,657 945 1,264 16) Total depreciation for the year (including Section 179 deduction). Add line 15 and line 9. 2,370 8,370 1,264Line 4—The cost of the vehicle is reduced for any adjustments to basis, such as the clean fuel deduction or alternative motor vehicle credit. Line 5—For the Audi (listed property used 50% or less for business), straight-line is the only method available.Line 6—Special depreciation allowance expired, generally, for assets placed in service after 2014. 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 6-7.

Example continued on the next page

available for vehicles placed in service during 2015.


Example: On January 17, 2015, Vicki leases a car for three years for use in her business. The car has a FMV of $32,250 on the first day of the lease term. Vicki uses the car for 65% business and 35% personal use. Each year, Vicki deducts as lease expense on her Schedule C the business-use percentage of the lease payments, reduced by the inclusion amounts shown below.

Tax Year Inclusion Amount

Pro-ration Business Use

Income Inclusion

2015.................. $ 24............ 349/365.......... 65% .... $ 152016.................. 52............ 366/366.......... 65........ 342017.................. 78............ 365/365.......... 65........ 5120181 ................ 78............ 16/365.......... 65........ 2

1 Preceding year’s lease inclusion amount used in final year of the lease.

N Observation: Using the standard mileage rate will avoid the lease income inclusion. However, this may not be beneficial since the lease payment (net of the lease income inclusion) plus actual expenses will often be greater than the standard mileage deduction.

alternative motor vehiCle CreDit

Expired Provision Alert: The alternative motor vehicle credit has expired for vehicles acquired after 2014. The following discus-sion is included in the event the credit is extended to 2015.

For vehicles purchased in 2014, the alternative motor vehicle credit is avail-able only for qualified fuel cell motor vehicles. (IRC §30B)Qualified fuel cell motor vehicle. These include, for example, vehicles that run on hydrogen power cells. Only new vehicles placed in service after 2005 and purchased before 2015 qualify for the credit. The IRS will certify the credit amount for qualifying vehicles. Tax-payers can rely on this certification. (Notice 2006-9)

Certified Fuel Cell Motor VehiclesMake Year Model Credit AmountHonda 2012 FCX Clarity Fuel Cell Vehicle $ 8,000Honda 2011 FCX Clarity Fuel Cell Vehicle 8,000 Honda 2010 FCX Clarity Fuel Cell Vehicle 8,000Honda 2009 FCX Clarity Fuel Cell Vehicle 12,000Honda 2008 FCX Clarity Fuel Cell Vehicle 12,000

Mercedes-Benz

2012 Mercedes-Benz F-Cell 8,000

Note: Current as of publication date. Check IRS website for updates. Search for “Qualified Fuel Cell Vehicles.”

Comparison of Standard Mileage Rate and Actual Cost Methods (2015)1

Note: See Rev. Proc. 2010-51 for detailed definitions and discussion of using standard mileage rates. Annual mileage rates are published in an IRS Notice. See Notice 2014-79 for 2015 amounts.

Standard Mileage Rate Method Actual Cost MethodAvailable to • Self-employed individuals and employees using a car for business

(including rental activities) (business mileage rate).• Individuals using a car for charitable, medical or job-related moving

purposes (charitable, medical or job-related move rates).• Taxpayers who use the car for hire (such as a taxi).Exceptions: Not available to taxpayers who:• Use five or more cars simultaneously in their business.• Claimed depreciation using a method other than SL, a Section 179

deduction or special depreciation allowance (if available) for the car.• Previously claimed actual car expense for a car they lease.• Are using an employer-provided vehicle for business.• Are rural mail carriers and receive a qualified reimbursement.

Any taxpayer using a car for business (including rental activities), charitable, medical or job-related moving purposes.Taxpayers can convert from the standard mileage method to the actual cost method any year. If the vehicle is not fully depreciated, the taxpayer must use SL depreciation based on remaining useful life.

Calculating the deduction

Multiply the following rates per mile by the number of miles driven:• Business—57.5¢ per mile.• Charitable—14¢ per mile.• Medical—23¢ per mile.• Job-related move—23¢ per mile. No additional deductions are allowed for the actual costs of owning and operating the car (such as depreciation or lease payments, maintenance, repairs, tires, gasoline, oil, insurance and registration fees).

Determine percentage of use (based on miles driven) for business, charitable, medical or moving purposes. Apply that percentage to actual expenses of owning and operating the vehicle, including: gasoline and oil, tires, lease payments, maintenance and repairs, insurance, registration fees and licenses and basis for depreciation/Section 179 expensing.Exception: For charitable, medical or moving use may deduct actual out-of-pocket costs directly attributable to use. No portion of depreciation, Section 179 expense, insurance or general maintenance expenses can be deducted.

Additional deductible expenses

• Parking fees and tolls for business, charitable, medical or moving use.• Business percentage of interest and personal property taxes. Exception: Employees must treat all interest as personal interest. [IRC §163(h)(2)(A)]• Nonbusiness percentage of personal property taxes (itemized deduction).

Depreciation and Section 179 rules

• Basis reduced (but not below zero) for business miles driven: • Generally, 200% DB five-year recovery period. But, can elect SL over five years (ADS) or 150% DB over five years (AMT method). See Tab 4 for MACRS depreciation tables.

• Annual depreciation limited under Code Section 280F for passenger autos.

• If used 50% or less for business, must use SL/five-year recovery period. No Section 179 expense or special depreciation allowance available.

Year Cents per mile Year Cents

per mile Year Cents per mile

1994–1999..... 12¢ 2005–2006......17¢ 2011 .............. 22¢2000............... 14 2007................19 2012–2013.... 232001–2002..... 15 2008–2009......21 2014.............. 222003–2004..... 16 2010................23 2015.............. 24

• No Section 179 expense or special depreciation allowance available.1 These methods are available for cars, which include vans, pickups and panel trucks.

2015

2017


ReportingThe 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 VehiclesA 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 have been (1) capable of achieving a speed of 45 miles per hour or greater and (2) manu-factured for use on public roads. The credit equaled 10% of the vehicle’s cost (limited to $2,500). [IRC §30D(g)]

RecaptureThe 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 §30(e)(5) and 30D(f)(5)]. As of the date of this publication, no regulations have been issued.

lease inCome inClusion table—eleCtriC autos

Code Section 280F(a)(1)(C), which directed the use of higher depreciation deduction limits for certain electric automobiles, was applicable only to property placed in service after 2001 and before 2007. Therefore, separate tables are no longer provided for electric automobiles. For electric automobiles placed in service in 2011–2015, taxpayers should use the table for Inclusion Amount—Cars in the Lease Income Inclusion Tables—Passenger Autos Leased in 2015 and 2014 on Page 6-13 or the Lease Income Inclusion Tables—Passenger Autos Leased in 2013 and 2012 on Page 6-14.

Electric Automobiles First Leased in 2006 Lease Income Inclusion Amounts

Automobile FMV Taxable Year During Leaseover not over 1st 2nd 3rd 4th 5th and later

$ 45,000 $ 46,000 4 8 11 12 1246,000 47,000 10 22 33 37 4247,000 48,000 17 36 54 63 7248,000 49,000 24 51 74 89 10149,000 50,000 30 65 96 114 131

$ 50,000 $ 51,000 37 79 118 139 16051,000 52,000 43 94 139 165 18952,000 53,000 50 108 160 190 21953,000 54,000 56 123 181 216 24854,000 55,000 63 137 202 242 277

$ 55,000 $ 56,000 69 151 224 267 30756,000 57,000 76 165 245 293 33757,000 58,000 82 180 266 318 36758,000 59,000 89 194 288 343 39659,000 60,000 95 209 309 369 425

$ 60,000 $ 62,000 105 230 341 407 47062,000 64,000 118 259 383 459 52864,000 66,000 131 288 425 510 58766,000 68,000 144 316 469 560 64668,000 70,000 158 345 510 612 705

$ 70,000 $ 72,000 171 373 554 662 76472,000 74,000 184 402 596 713 82374,000 76,000 197 431 638 765 88176,000 78,000 210 459 682 815 94078,000 80,000 223 488 724 866 1,000

$ 80,000 $ 85,000 246 538 798 956 1,10385,000 90,000 278 610 905 1,083 1,25090,000 95,000 311 682 1,011 1,211 1,39795,000 100,000 344 753 1,118 1,338 1,544

Note: See Rev. Proc. 2006-18 for FMV over $100,000.

lease inCome inClusion tables a & b—property other than passenGer automobiles

Table ARates to Figure Inclusion Amounts for Leased Listed Property

Property’s ADS Recovery Period

First Tax Year During Lease in Which Business Use is 50% or Less

1 2 3 4 5 6 7 8 9 10 11 12 & Later

Less than 7 years 2.1% -7.2% -19.8% -20.1% -12.4% -12.4% -12.4% -12.4% -12.4% -12.4% -12.4% -12.4%7 to 10 years 3.9 -3.8 -17.7 -25.1 -27.8 -27.2 -27.1 -27.6 -23.7 -14.7 -14.7 -14.7

More than 10 years 6.6 -1.6 -16.9 -25.6 -29.9 -31.1 -32.8 -35.1 -33.3 -26.7 -19.7 -12.2

Table BRates to Figure Inclusion Amounts for Leased Listed Property

Property’s ADS Recovery Period

First Tax Year During Lease in Which Business Use is 50% or Less

1 2 3 4 5 6 7 8 9 10 11 12 & Later

Less than 7 years 0.0% 10.0% 22.0% 21.2% 12.7% 12.7% 12.7% 12.7% 12.7% 12.7% 12.7% 12.7%7 to 10 years 0.0 9.3 23.8 31.3 33.8 32.7 31.6 30.5 25.0 15.0 15.0 15.0

More than 10 years 0.0 10.1 26.3 35.4 39.6 40.2 40.8 41.4 37.5 29.2 20.8 12.5

is

20162015

s


Real Property

Depreciable Real Property (2015)1

Description Definition AuthoritySection 1245 / 1250

Regular Tax Recovery Period /

Method

AMT Recovery Period /

Method2

ADS Recovery

PeriodResidential Rental Property3

A building or structure if at least 80% of the gross rents are 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 §168(e)(2) 1250 27.5-year / SL 27.5-year / SL 40-year

Nonresidential Real Property3

IRC Section 1250 property that is not (1) residential rental property or (2) property with a class life of less than 27.5 years. Includes items such as an office building, store or warehouse.

IRC §168(e)(2) 1250 39-year / SL4 39-year / SL 40-year

Land Improvements Depreciable improvements to land, whether classified as Section 1245 or Section 1250 property. See Land Improvements 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.

Rev. Proc. 87-56 (Asset Class 00.3)

Both 15-year / 150% DB If Section 1245 property:

15-year / 150% DB;If Section 1250

property: 15-year / SL

20-year

Billboards classified as Section 1245 Property

See Billboards on Page 7-3. Rev. Rul. 80-151, Rev. Proc. 87-56

(Asset Class 57.1)

1245 15-year / 150% DB 15-year / 150% DB 20-year

Billboards classified as Section 1250 Property

See Billboards on Page 7-3. Rev. Rul. 80-151, Rev. Proc. 87-56

(Asset Class 57.1)

1250 15-year / 150% DB 15-year / SL 20-year

Open-Air Parking Structures

See Open-Air Parking Structures on Page 7-2. IRC §168(e)(2) 1250 39-year / SL4 39-year / SL 40-year

Qualified Leasehold Improvements

See Qualified Leasehold Improvements on Page 7-9 for definition and effective dates.

IRC §168(b)(3) and (e)(3)(E)

1250 15-year / SL4, 5 15-year / SL5 39-year5

Qualified Restaurant Property

See Qualified Restaurant Property on Page 7-10 for definition and effective dates.

IRC §168(b)(3) and (e)(3)(E)


Qualified Retail Improvement Property

See Qualified Retail Improvement Property on Page 7-10 for definition and effective dates.

IRC §168(b)(3) and (e)(3)(E)


Retail Motor Fuels Outlet

See Gas Stations and Convenience Stores on Page 7-3. IRC §168(e)(3)(E) 1250 15-year / 150% DB 15-year / SL 20-year

Farm Buildings Except single-purpose agricultural and horticultural structures. See Farm Buildings on Page 7-3.

Rev. Proc. 87-56 (Asset Class 01.3)

1250 20-year / 150% DB 20-year / SL 25-year

Single Purpose Agricultural and Horticultural Structures

See Farm Buildings on Page 7-3. IRC §168(e)(3)(D) 1245 10-year / 150% DB 10-year / 150% DB 15-year

1 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).2 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 (39-year if ADS) if placed in service at certain times before 2015—see discussion referenced in Definition column.

Tab 7 TopicsWhat Is Real Property? ........................................... Page 7-2Residential Rental Property .................................... Page 7-2Open-Air Parking Structures .................................. Page 7-2Billboards ................................................................ Page 7-3Gas Stations and Convenience Stores ................... Page 7-3Farm Buildings ........................................................ Page 7-3Business Use of Home ........................................... Page 7-4Converting a Residence to Rental Property............ Page 7-4Effect of Rental or Business Use on Sale of

Residence............................................................. Page 7-4Land Improvements ................................................ Page 7-5Energy Efficient Commercial Building Deduction .... Page 7-7Builders of Energy Efficient New Homes Credit ...... Page 7-8

Nonbusiness Energy Property Credit...................... Page 7-8Residential Energy Efficient Property Credit ........... Page 7-8Leasehold Improvements........................................ Page 7-9Finding Personal Property Included in a Building’s

Cost (Cost Segregation) ..................................... Page 7-11Structural Component vs. Personal Property........ Page 7-12IRS View of Cost Segregation Studies ................. Page 7-13Quick List—Court Cases on Real vs. Personal

Property .............................................................. Page 7-14Guide to Assets Used in the Restaurant Industry Per

IRS Cost Segregation Audit Techniques Guide.... Page 7-22Guide to Assets Used in a Retail Business Per

IRS Cost Segregation Audit Techniques Guide.... Page 7-26IRS Evaluation of Cost Segregation Studies ........ Page 7-41


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 classi-fied 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 PropertyGenerally, 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 2010–2014. Expired Provision Alert: Section 179 expensing for qualified real property is not available for property placed in service in tax years beginning after 2014 unless legislation is enacted to extend it. Tax professionals should watch for developments.

Special (Bonus) Depreciation for Real Property Expired Provision Alert: Certain new property placed in ser-vice during 2008–2014 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 2014 (except for certain Long Production Period Property and Aircraft as discussed on Page 2-12), this discussion is included in the event that special depre-ciation is extended to 2015.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 de-preciation (provided all other requirements are met):•Billboards(seeBillboards on Page 7-3).•Retailfueloutlets(seeRetail motor fuels outlet on Page 7-3).•Farmbuildingsandsinglepurposeagriculturalandhorticultural

structures (see Farm Buildings on Page 7-3).•LandImprovements,suchassidewalks,fencesandroads(see

Land Improvements on Page 7-5).•Qualifiedleaseholdimprovementproperty(seeQualified Lease-

hold 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 BuildingsWhile 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 or3) 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 gen-erally 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 propertyResidential 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 apart-ments 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 taxpay-ers 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:•Hydraulicelevators.•Internalstairwells.•Interiorlighting.•Firesprinklers.•Signage to facilitate safe and speedy evacuations during an

emergency. •Aseparateareaorroomforelectricmeteringandswitching.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 replac-ing these CIPs. To the extent that the CIP included guidance or tools relevant to addressing an issue or transaction, such guidance

after 2009

2015


Other Construction CostsImpact fees. Impact fees (one-time charges to finance specific offsite capital improvements for general public use) paid by de-velopers should be capitalized and added to the cost of newly constructed buildings, rather than considered a cost of the non-depreciable land. (Rev. Rul. 2002-9)Density variances. The cost of so-called density variances al-lowing 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 2005-34). 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 thesurveywillnotnecessarilyneedtoberedonewhenthe

depreciable improvement is replaced, the cost of the survey is associated with the land and, therefore, is not depreciable.

•Asurveythatmustberedonewhenthedepreciableimprovementis 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)

enerGy effiCient CommerCial builDinG DeDuCtion

Expired Provision Alert: Taxpayers that own or lease com-mercial 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 2015. Although the deduction for the cost of energy efficient commercial building property has expired for property placed in service after 2014, this discussion is included in the event the deduction is extended to 2015.

Qualifying PropertyEnergy efficient commercial building property is depreciable property that is:•InstalledonorinabuildinglocatedintheU.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.

•Partofthe(1)interiorlightingsystem,(2)heating,cooling,ven-tilation 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)]

•Certifiedthatitwillreduceorispartofaplantoreducetheoverallenergy costs of these systems by 50% or more.

CertificationBefore 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 certifica-tion in their tax records.

Deduction AmountThe 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.

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 2014 and $6,000 in 2015. 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 2014 and $2,400 ($5,400 – $3,000) spent in 2015. The remaining 2015 costs of $3,600 ($6,000 – $2,400) must be capitalized and depreciated.

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)]

Road Building CostsType 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

Excavating, grading and removing soil to 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

Excavating, grading and removing soil to 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, clarifyingRev. 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 is subject to wear and tear (has an expected useful life).

Rev. Rul. 88-99

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

2017


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, 2008-40 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 de-duction is subject to Section 1245 ordinary income recap-ture 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 2014. The following discussion is included in the event the credit is extended to 2015.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. •Toqualify,thedwellingunitmustbecertifiedtohave

annual energy consumption for heating and cooling that is at least 50% less than comparable units and meet certain other requirements.

•Thecreditcanalsoapplytoasubstantialreconstruc-tion and rehabilitation of an existing dwelling unit.

•Amanufacturedhomethatmeetsa30%reducedenergyconsumption standard can generate a $1,000 credit.

•Thesecreditsonlyapplytohomessoldbycontractorsforuseas personal residences.

•Thecontractor’staxbasisinthehomeisreducedbytheamountof the credit.

•Construction must be substantially completed after August 8, 2005, and the home must be purchased after 2005 and before 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 2014. The following discussion is included in the event the credit is extended to 2015.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 applied to property placed in service in 2006, 2007 and 2009–2014.

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); and3) 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 ExpendituresExpenditures 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 RequirementsTaxpayers must receive a proper certification from the manufac-turer 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 speci-fied therein.

Allocation of CostsCosts eligible for the nonbusiness energy property credit (IRC §25C) and the Residential Energy Efficient Property Credit discussed below (IRC §25D) can be allocated according to the manufacturer’s certification that a portion of the property is quali-fied 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 prop-erty placed in service in 2006–2016. (IRC §25D; Notice 2013-70)

2016s

2017


Residential Energy Efficient Property Credit—2015Property Type Credit Amount

Solar Water Heating 30% of cost (in tax years beginning before 2009, the credit was capped at $2,000)

Solar Electric 30% of cost (in tax years beginning before 2009, the credit was capped at $2,000)

Fuel Cells 30% of cost; max credit = $1,000 per kW of capacitySmall Wind Energy 30% of cost (in tax years beginning before 2009, the

credit was capped at $4,000)Geothermal Heat Pump

30% of cost (in tax years beginning before 2009, the credit was capped at $2,000)

•Thecredit(otherthanforfuelcells)isavailableforequipmentforthe taxpayer’s personal residence, which must be in the U.S. The credit for fuel cell property is only available for a principal residence.

•Nocreditisallowedforequipmentusedtoheatswimmingpoolsor hot tubs.

•Thecost includes laborcostsproperlyallocable to theonsitepreparation, assembly or original installation of the property and for piping or wiring to interconnect such property to the home.

•The taxpayer’sbasis in the credit property is reducedby theamount of the credit.

•ThecreditcanoffsetbothregulartaxandAMT.Anyunusedcreditcan be carried forward to the next year. [IRC §25D(c)]

•Taxpayerscanrelyonmanufacturer’sstatementsandcertificationsthat property qualifies for the credit. (Notices 2009-41 and 2013-70)

•Creditisavailablefornewconstructionaswellasimprovementsto 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 ImprovementsCapitalized 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 mat-ter 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 in the next column 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 ten-ant/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 improve-ments 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 aban-doned or disposed of, the landlord continues to depreciate them.

Example #2: Walter owns a commercial building that he leased to a veteri-narian 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 2015, special rules for Sec-tion 179 expensing, 15-year recovery period and special (bonus) depreciation applied to qualified leasehold improvements. How-ever, these provisions are not available for 2015 unless Congress enacts legislation that extends them. This section is included in the event the rules are extended to 2015. If the rules are not ex-tended, property that formerly was classified as qualified leasehold improvements and placed in service in 2015 is depreciated under the general MACRS rules—see the Depreciable Real Property (2015) table on Page 7-1 and Depreciating Leasehold Improve-ments in the previous column.

Qualified Leasehold Improvements Depreciation Summary (2015)

Item IRC §Depreciation Method 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)1 15-year recovery period also applied if placed in service 10/23/04–12/31/14.2 Special depreciation also available if placed in service 9/11/01–12/31/04 or

2008–2014.3 Also eligible if placed in service in a year beginning in 2010–2014. 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 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.

Continued on the next page


3) The improvement is made by the lessee (tenant), sublessee or the lessor (landlord) pursuant a lease agreement (or a com-mitment 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 gener-ally 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 share-holder 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 ef-fect 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.

Qualified Restaurant Property Expired Provision Alert: Before 2015, special rules for Sec-tion 179 expensing and 15-year recovery period applied to qualified restaurant property. However, these provisions are not available for 2015 unless Congress enacts legislation that extends them. This section is included in the event the rules are extended to 2015. If the rules are not extended, property that formerly was classified as qualified restaurant property and placed in service in 2015 is depreciated under the general MACRS rules—see the Depreciable Real Property (2015) table on Page 7-1.

Qualified Restaurant Property Depreciation Summary (2015)

Item IRC §Depreciation Method SL 168(b)(3)Recovery Period 15 yr1 168(e)(3)(E)Eligible for Special Depreciation? No2 168(e)(7)Eligible for Section 179 expensing? Yes3 179(f)1 15-year recovery period also applied if placed in service 10/23/04–12/31/14.2 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.

3 Also eligible if placed in service in a year beginning in 2010–2014. 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.

The definition of qualified restaurant property has been modified several times. [IRC §168(e)(7)]

Qualified Restaurant Property DefinedPlaced in Service Definition10/23/04–12/31/07 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.

1/1/08–12/31/08 Same as preceding row, but the three-year rule doesn’t apply.

After 2008 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 drive-through 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 2015, 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 2015 unless Congress enacts legislation that extends them. This section is included in the event the rules are extended to 2015. If the rules are not extended, property that formerly was classified as qualified retail improvement property and placed in service in 2015 is depreciated under the general MACRS rules—see the Depreciable Real Property (2015) table on Page 7-1 and Depreciating Leasehold Improvements on Page 7-9.

Qualified Retail Improvements Depreciation Summary (2015)

Item IRC §

Depreciation Method SL 168(b)(3)

Recovery Period 15 yr1 168(e)(3)(E)

Eligible for Special Depreciation? No2 168(e)(8)

Eligible for Section 179 expensing? Yes3 179(f)

1 15-year recovery period also applied if placed in service in 2009–2014.2 Unless property also meets the definition of qualified leasehold improvements.

(Rev. Proc. 2011-26)3 Also eligible if placed in service in a year beginning in 2010–2014. 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 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.


IRS Ruling: A late election out was allowed when the return preparer failed to file an extension request for the return for the year of sale. Taxpayer’s intent to elect out of installment method was evidenced by the fact he made estimated tax payments for the year of sale based on including the entire gain in income that year. (PLR 199935075)

The election out is made by reporting the entire gain in the sale year on the appropriate form (for example, Form 4797 or Form 8949). Once made, the election cannot be revoked without IRS approval.@ Strategy: It may be beneficial for the seller to elect out of the installment method and report the entire gain in the year of sale if:•Sellerhasexpiringcarryovers(NOL,charitablecontributionor

business credit carryovers) that can shelter the gain.•Sellerhasataxlossorlittletaxableincomesothattaxonthe

gain would be paid at a relatively low rate.•Installment gain relates to a passive activitywith suspended

losses that equal or exceed the gain. (An installment sale of an entire interest in a passive activity with suspended losses requires the suspended loss to be recognized ratably as the installment gain is recognized.)

•Selleranticipatestaxlawchangesthatwillresultinadditionaltaxif gain is deferred to future tax years.

borroWer’s property is foreCloseD or repossesseD

When a borrower (buyer) fails to make payments on a loan secured by property acquired, the lender (seller) may foreclose on the loan or repossess the property. The foreclosure or repossession is treated as a sale or exchange from which the borrower may realize gain or loss. This is true even if the property is voluntarily returned to the lender.A borrower’s gain or loss from a foreclosure or repossession is computed and reported the same way as gain or loss from a sale or exchange. The gain or loss is the difference between the ad-justed basis in the transferred property and the amount realized.

Cancellation of Debt (COD) IncomeA borrower who is personally liable on the debt has COD income when the debt is satisfied by foreclosure or repossession and the FMV of the property transferred is less than the loan balance. This income is separate from any gain or loss realized from the foreclosure or repossession.Individuals report COD income related to a business or rental activity as business income on Schedule C or rental income on Schedule E. COD income from cancellation of a nonbusiness debt is other income reported on Form 1040, line 21.Corporations report COD income as “Other income” on page one of their returns (on Form 8825 if the cancelled debt pertains to property used in a rental real estate operation by an S corporation). Because the treatment of COD is determined at the partner level, partnerships report COD income as a separately stated item on Form 1065, Schedule K-1 [box 11, Other income (loss), code E].Exceptions. Income from cancellation of debt is not taxed if any of the following conditions apply: [IRC §108(a)(1)]•Thecancellationisintendedasagift.•Thedebtisqualifiedfarmdebt(seePub.225).•Thedebtisqualifiedrealpropertybusinessdebt(seePub.334).•Theborrowerisinsolventorbankrupt(seePub.908).•The debt was qualified principal residence indebtedness

discharged before 2015 (defined later).

Court Case: The taxpayer was a general partner in a partnership and per-sonally guaranteed some of the partnership’s debts. The partnership filed Chapter 11 bankruptcy which was approved and released the partners from all liability related to the partnership. The taxpayer did not include the cancel-lation of debt income (COD income) allocated to him by the partnership on his tax return for the year of discharge. The IRS sent the taxpayer a notice of deficiency. The Tax Court held that the taxpayer could exclude his COD income because the partnership debt was discharged in Chapter 11 bank-ruptcy. The IRS disagrees with the Tax Court’s ruling, as discussed below. (Gracia, Jose, TC Memo 2004-147)

U Caution: In 2015, the IRS announced its nonacquiesence in the Gracia case as well as three related Tax Court cases, each of which held that a partner’s exclusion of partnership debt cancella-tion income was appropriate. In each of these cases, the partner guaranteed the partnership’s debt and was not in bankruptcy in his individual capacity. The partnership, not the partners, filed for bankruptcy, and none of the partners met the Bankruptcy Code’s definition of a debtor. According to the IRS, the Tax Court’s rulings were inconsistent with the structure of Code Section 108 and Con-gressional intent, which applies only to partners who are debtors in bankruptcy. Therefore, in all of these cases, the IRS has now concluded that none of the partners should have been entitled to exclude his share of the partnership cancellation of debt income. (AOD 2015-001)

Borrower’s Tax Treatment—Foreclosure or Repossession

Property Secured by

Nonrecourse Debt Recourse Debt

Description of Debt Borrower is not personally liable to repay the debt even if the value of the property used to satisfy the debt is less than the outstanding debt.

Borrower is personally liable to pay any amount of the debt not covered by the property’s value.

Reporting by Lender

Box 5 on Form 1099-A, Acquisition or Abandonment of Secured Property, is not checked.

Box 5 on Form 1099-A is checked.

Amount realized for borrower’s gain or loss on transaction

Full amount of debt canceled by the transfer of property.

Smaller of the debt canceled or the FMV of the transferred property.

Borrower’s cancellation of debt (COD) income

None. COD (ordinary) income if the loan balance exceeds property’s FMV.1

1 Note: The borrower may be able to exclude the income in certain situations. See Cancellation of Debt (COD) Income in the previous column.

Example: Chris bought a new car for $15,000. Chris is not personally liable for the loan (nonrecourse), but pledges the new car as security. The lender repossessed the car because he stopped making loan payments. The balance due on Chris’ loan was $10,000. The car’s FMV when it was repossessed was $9,000. The amount Chris realized on the repossession is $10,000. That is the debt canceled by the repossession, even though the car’s FMV is less than $10,000. Chris figures his gain or loss on the repossession by comparing the amount realized ($10,000) with his adjusted basis ($15,000). He has a $5,000 nondeductible loss. Because the loan was nonrecourse, he recognizes no income for the cancellation of debt.Variation: Now assume Chris was personally liable for the car loan (recourse debt) and that, after repossessing the car, the lender wrote off the remaining debt. In this case, the amount he realizes on the repossession is $9,000. This is the canceled debt ($10,000) up to the car’s FMV ($9,000). Chris figures his gain or loss on the repossession by comparing the amount realized ($9,000) with his adjusted basis ($15,000). He has a $6,000 nondeductible loss. He also recognizes ordinary income from cancellation of debt of $1,000 ($10,000 debt cancelled – $9,000 property FMV). This is the part of the canceled debt not included in the amount realized.


Foreclosures and Repossessions WorksheetPart 1. Income from cancellation of debt. Note: If the taxpayer is not personally liable for the debt, there is no income from debt cancellation. Skip Part 1 and go to Part 2.1) Enter the amount of debt canceled by the transfer of

property ................................................................................ 1) $ 2) Enter the FMV of the transferred property ........................... 2) < >3) Income from cancellation of debt.1 Subtract line 2 from

line 1. If less than zero, enter -0- .......................................... 3) $ Part 2. Gain or loss from foreclosure or repossession.4) Enter the smaller of line 1 or line 2. Also include any

proceeds received from the foreclosure sale. (If the taxpayer is not personally liable for the debt, enter the amount of debt canceled by the transfer of property.) ......... 4) $

5) Enter the adjusted basis of the transferred property ........... 5) < >6) Gain or loss from foreclosure or repossession. Subtract

line 5 from line 4 .................................................................. 6) $ 1 This income may not be taxable. See Cancellation of debt (COD) income on Page

8-13.

Qualified Principal Residence Indebtedness Expired Provision Alert: The exclusion for COD income on qualified principal residence debt expired on December 31, 2014. Unless Congress extends the provision, it will not be available for debt forgiven after 2014. This discussion is retained in the event the provision is extended to 2015.

The exclusion of COD income from taxable gross income is avail-able for qualified principal residence indebtedness discharged after 2006 and before 2015 [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 improve-ment 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 reduces (but not below zero) the basis of the taxpayer’s principal residence. The exclusion from income for qualified principal residence indebtedness is re-ported on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).

repossessinG personal propertyTaxpayers 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.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 obliga-tion 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 install-ment obligation (plus any repossession expenses) from the property’s FMV plus the FMV of any other assets received in the transaction.

Lender’s Tax Treatment— Foreclosure or Repossession of Personal Property

Original Sale Reported Installment method

not used Installment method

usedBasis 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.

Unpaid balance of debt multiplied by one minus the gross profit percentage on the sale.

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.

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.

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

N/A

Basis in repossessed property

FMV at date of repossession. FMV at date of repossession.

1 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.

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 w as $1,400. The legal costs of repossession were $75. Courtney’s gain on the repossession is as follows:

FMV of repossessed property ......................................................... $ 1,400Unpaid note balance ........................................................................ 800Gross profit percentage ................................................................... × 40%Unrealized profit .............................................................................. $ 320Basis in installment note ($800 – $320) .......................................... $ 480Repossession costs ......................................................................... 75 Total basis and costs ($480 + $75) .................................................. $ 555Gain ($1,400 – $555) ....................................................................... $ 845

2017


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 dis-posed of on June 30, 2015 (even though the exchange occurred in January). Therefore, six months of depreciation is taken on the farm building in 2015. The exchanged basis in the replacement (apartment) building is considered placed in service on July 1, 2015. It is depreciated SL over its remaining 22.5-year 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 2015 depreciation expense is computed as follows: Exchanged basis ........................................................................... $ 339,107 Divided by remaining recovery period ........................................... ÷ 22.5 Annual depreciation ....................................................................... $ 15,071 Pro-rated using mid-month convention ......................................... × 5.5/12

2015 depreciation on apartment building ...................................... $ 6,908

Depreciating Excess BasisGenerally, 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)]•Taxyearinwhichreplacementpropertyisplacedinserviceor•Taxyearinwhichrelinquishedpropertyisdisposedof.

Example: GreatCo placed a retail building in service in 1999. On January 16, 2015, GreatCo exchanges the retail building plus $2 million cash for an office building in a like-kind exchange. After considering year-of-exchange deprecia-tion, 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, 2015. GreatCo depreciates this $2 million amount over 39 years, using the straight-line method and mid-month convention.

Special (Bonus) Depreciation AllowanceBoth 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 2014 (except for certain long production period property and aircraft—see Tab 2). The above discussion is included in the event it is extended to 2015.

Section 179 ExpenseOnly 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 PeriodA 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 TreatmentTaxpayers 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 PropertyReg §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 2007. In January 2015, 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 2015. 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 gen-eral rule, the exchanged basis and excess basis are often shown as one new asset on the depreciation schedule. The cost and ac-cumulated 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


all adjustments for prior depreciation or amortization (including depreciation on the relinquished property). In other words, electing to depreciate a replace-ment asset as a new asset does not remove the depreciation recapture taint associated with the relinquished property. See Depreciation Recap-ture on Page 9-5.Separate election where relinquished property was electively excluded from MACRS. Taxpayers that elected under Code Sec-tion 168(f)(1) to exclude the relinquished property from MACRS depreciation may elect under Regulation Section 1.168(i)-6(i)(2) to depreciate the sum of the exchanged basis and excess basis of the replacement property as MACRS property placed in service at the time of the replacement. This may enable a taxpayer to expense replacement property under the special (bonus) depreciation rules, if available. [See Unit-of-Production Method on Page 3-4 for further discussion of the Section 168(f)(1) election.]

Depreciating Vehicles Received in a TradeWhen a vehicle is acquired in a trade, the Section 280F limits (see Tab 6) must be considered for computing both the year-of-disposition depreciation for the old vehicle and the depreciation for the new vehicle. In the year of exchange, the total depreciation claimed (on the old and the new vehicle) is subject to one Section 280F limit, which is the depreciation limit that would apply to the replacement (new) vehicle [Reg. §1.168(i)-6(d)(3)]. Once that amount has been reached, no more depreciation is available that year. However, see Electing new asset treatment for traded autos in the next column for a way to possibly claim more depreciation.

Depreciating Vehicles Acquired in a Trade Reg §1.168(i)-6(d)(3)(ii)

Step Compute: Deduction limited to:1 Depreciation on old car. Use applicable

convention for the year of disposition.Lesser of: 280F limit for the old car or the limit for the new car.1

2 Special (bonus) depreciation allowance (discussed in Tab 2) on new car’s exchanged basis (basis in the old car after step 1).

280F limit for the new car, less amount deducted in step 1.

3 MACRS depreciation on new car’s exchanged basis [after special (bonus) depreciation allowance]. Use same convention as for old car and the remaining recovery period. See Depreciating Exchanged Basis on Page 9-6.

Lesser of: 280F limit for the old car or the limit for the new car, less amounts deducted in steps 1 and 2.

4 Section 179 expense on the new car’s excess basis.

280F limit for new car, less amounts deducted in steps 1–3.

5 Special (bonus) depreciation allowance on new car’s excess basis (after Section 179 deduction).


6 MACRS depreciation on new car’s excess basis [after Section 179 deduction and special depreciation allowance]. Use applicable convention for the acquisition year and 5-year recovery period. See Depreciating Excess Basis on Page 9-7.


1 If the replacement vehicle is acquired in a year after the year of disposition, depreciation is limited to the 280F limit for the old car.

Example: Jim purchased a used Honda car in February 2012 for $20,000. He used it 100% in his business. In November 2015, Jim exchanges, in a like-kind exchange, his Honda plus $14,000 cash for a used Mazda car that will also be used solely in his business. Jim claims a Section 179 deduction on the Mazda’s excess basis. The 2015 Section 280F limit for the Honda (if the trade hadn’t occurred) is $1,875. The 2015 280F limit for the used Mazda is $3,160. The depreciation and basis calculations for 2015 are as follows:

Depreciation BasisHonda basis at December 31, 2014 ($20,000 cost – $3,160 – $5,100 – $3,050) ..................................................................... $ 8,6902015 depreciation on Honda ($20,000 × 11.52% ÷ 2, limited to $1,875) ................................................................. < 1,152>Exchanged basis in Mazda ..................................................................... $ 7,5382015 depreciation on Mazda exchanged basis ($7,538 × 11.52% ÷ 2, limited to $1,875 – $1,152) .............................. < 434>Mazda exchanged basis at December 31, 2015 .................................... $ 7,104

Mazda excess basis .............................................................................. $ 14,000Sec. 179 deduction (limited to $3,160 – $1,152 – $434)..... < 1,574>Depreciation on Mazda excess basis [($14,000 – $1,574) × 20%, limited to $3,160 – $1,152 – $434 – $1,574] ........... < 0>Mazda excess basis at December 31, 2015 ........................................... $ 12,426

Total 2015 depreciation ($1,152 + $434 + $1,574) .............. < 3,160>Basis of Mazda at end of 2015 ($7,104 + $12,426) ............................... $ 19,530

Electing new asset treatment for traded autos. Under the gen-eral rule for computing depreciation on a vehicle trade-in, a single annual depreciation limit applies to both the new vehicle and the relinquished vehicle. If, however, the taxpayer elects new asset treatment, the relinquished vehicle and the new vehicle are each subject to their own respective depreciation limits. See Electing New Asset Treatment on Page 9-7.

Example: In 2015, Ann trades a car acquired used in 2012 and subject to the Section 280F limit for another used car also subject to the 280F limit. The replacement vehicle is subject to a first-year depreciation limit of $3,160 for 2015, while the relinquished vehicle is subject to a depreciation limit of $1,875 (its fourth year). If Ann follows the general rule, her 2015 total depreciation for both vehicles is limited to $3,160. On the other hand, if Ann elects new asset treatment, she will have available a limit of $1,875 on the old vehicle, and a separate limit of $3,160 on the new vehicle.

New asset treatment can avoid Section 280F limits. Electing new asset treatment allows the adjusted basis of a vehicle sub-ject to the 280F depreciation limit to be included in the basis of a greater-than-6,000-pound vehicle that is not subject to the limit.

Example: In 2015, Bud trades a passenger auto subject to the Section 280F depreciation limit for a Ford F-150, a vehicle weighing over 6,000 pounds that is not subject to the Section 280F depreciation limit. Bud elects new asset treat-ment and combines the adjusted basis of the passenger auto (after depreciation for the year of trade) with the boot paid for the F150. This total adjusted tax basis in the F150 is eligible for depreciation without the Section 280F limit.

æ Practice Tip: Employees (not employers) who trade a vehicle used for business in a like-kind exchange elect new asset treatment by claiming depreciation (computed by treating the replacement property as a new asset) on Form 2106 and attaching the required statement. See Making the election on Page 9-7. If the new asset election is not made, depreciation on the replacement vehicle is reported on Form 4562.


Correcting Depreciation Errors

makinG DepreCiation ChanGesTaxpayers occasionally find the amount of depreciation or amor-tization claimed on a capitalized item to be either too much or too little. They may also find items that should have been capitalized have been expensed, or vice versa. Depending on the situation, depreciation and amortization errors are corrected either by:1) Filing an amended return or2) Requesting a change in the taxpayer’s accounting method.N Observation: For simplicity, depreciation and amortization changes will be referred to as “depreciation changes” throughout this discussion.If a method of computing depreciation (or of expensing or capitalizing costs) is an accounting method, changes can only be made by requesting a change in accounting method (see Accounting Method Changes Made on Form 3115 in the next column). The change cannot be made by filing an amended return. A change to depreciation that is not an accounting method change generally can be made by amending the return. See Errors Corrected on an Amended Return on Page 10-4.U Caution: Generally, neither of these methods can be used to make a late election (or to untimely revoke an election) for special (bonus) depreciation on eligible assets. See Changing Special (Bonus) Depreciation on Page 10-4. Note: Changes to depreciation caused by a change in an as-set’s use by the same taxpayer are typically handled prospectively. See Changes in an Asset’s Use on Page 2-16.

DepreCiation as an aCCountinG methoD

How a depreciation correction is handled depends on whether the depreciation method being changed is an accounting method. Generally, if an impermissible accounting method is used on two or more tax returns, the taxpayer is considered to have adopted that method (Rev. Rul. 90-38). Once an accounting method is adopted, taxpayers must receive IRS permission to change it, generally by filing Form 3115. (See Requesting an Accounting Method Change on Page 10-2.) Permission to change is required even if the tax-payer’s accounting method is erroneous (for example, depreciating an asset over the wrong recovery period).

N Observation: If the impermissible method has been used for only one year, an accounting method would not have been estab-lished, and it can be corrected on an amended return. See Errors Corrected on an Amended Return on Page 10-4.

Accounting Method Changes Made on Form 3115Note: Not an all-inclusive list.

Description ExampleA change in the method, recovery period or convention for a depreciable or amortizable asset.

A building used for commercial purposes is inadvertently depreciated over 27.5 years rather than the proper 39 years.

A change from not claiming to claiming special (bonus) depreciation1 on eligible property, if the taxpayer has not already elected out of special depreciation for that asset.

Taxpayer purchases property eligible for special (bonus) depreciation, but fails to claim special depreciation on it. Taxpayer did not elect out of special depreciation.

Changing from claiming 30% special (bonus) depreciation to claiming 50% special depreciation, if the taxpayer has not elected to claim 30% instead of 50% depreciation on the asset.2

Taxpayer purchases an asset qualifying for 50% special (bonus) depreciation in 2004. Taxpayer did not elect out of special depreciation or elect to apply 30% rather than 50% depreciation to the asset. However, 30% special depreciation was inadvertently claimed on the asset.2

Changing from claiming 50% special (bonus) depreciation to claiming 30% special depreciation on assets that did not qualify for 50% special depreciation or for which the taxpayer elected to apply the 30% rather than the 50% rate.2

Taxpayer purchases an asset qualifying for 50% special (bonus) depreciation in 2004. Taxpayer elects to apply 30% rather than 50% depreciation to the asset. However, 50% special depreciation was inadvertently claimed on the asset.2

A change to remove special (bonus) depreciation1 for an asset that is not qualified property.

Taxpayer claims special (bonus) depreciation on an asset that did not qualify for special depreciation.

A change in salvage value to zero if the asset’s salvage value is expressly treated as zero by the Code or regulations.

Salvage value is zero for all MACRS [IRC §168(b)(4)] and Section 197 assets. Any depreciation or amortization computed for such assets that considers a salvage value can only be corrected on Form 3115.

A change in treatment from non-depreciable to depreciable, or vice versa.

Taxpayer constructs a building. All landscaping is booked to land improvements and depreciated, but some of it is too far from the building to qualify.

A change to capitalize an expenditure that had previously been expensed.

Taxpayer constructs a building and inadvertently books some costs to the repairs account and expenses them on its return.

A change in accounting for depreciable assets from single to multiple asset accounts (MAAs) (pooling), or vice versa, or from one type of MAA to another.

Taxpayer changes from accounting for depreciable assets in single asset accounts to accounting for them in MAAs (pools).

A change in the method of identifying disposed assets for MAAs (pools).

Taxpayer changes from accounting for the disposal of assets in MAAs from specific identification to first-in, first-out.

A change in method of accounting for amounts paid to acquire, produce or improve tangible property as prescribed under the tangible property regulations.

Taxpayer changes from capitalizing to deducting incidental materials and supplies when paid or incurred. [Reg. §1.162-3(a)(2); Rev. Proc. 2014-16]

1 Includes depreciation, if available, under Code Sections 168(k), 1400L and 1400N. See the Special (Bonus) Depreciation Summary table on Page 10-4 for details.

2 See the Special (Bonus) Depreciation Summary table on Page 10-4 for years these provisions were available.

Tab 10 TopicsMaking Depreciation Changes .............................. Page 10-1Depreciation as an Accounting Method ................ Page 10-1Requesting an Accounting Method Change.......... Page 10-2Section 481(a) Adjustments .................................. Page 10-3Depreciation Changes for Disposed Assets.......... Page 10-3Changing Special (Bonus) Depreciation ............... Page 10-4Accounting Method Changes And Tangible

Property Regulations .......................................... Page 10-4Errors Corrected on an Amended Return ............. Page 10-4Example—Change in Accounting Method ............ Page 10-5Sample Filled-In Form 3115 .................................. Page 10-6Form 3115 Instructions ....................................... Page 10-13


Example: LynnCo. purchased a $100,000 printer in 2013. It is depreciated over a seven-year recovery period. In 2015, LynnCo. sells the printer for $60,000. In 2016, LynnCo.’s 2015 return is audited and the IRS changes the recovery period on the printer from seven to five years. The actual and allowable depre-ciation and the effect of the IRS change to the recovery period are as follows:

As Reported Per IRSSales proceeds ............................................. $ 60,000 $ 60,000Cost ...................................... $ 100,000 $100,000Accum. deprec. ..................... < 47,530 > < 61,600 >Adjusted basis .............................................. < 52,470> < 38,400>Gain .............................................................. $ 7,530 $ 21,600The IRS proposes to increase 2015 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 2015 (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 2015 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 2015, special depreciation was available. With the excep-tion of Long Production Period Property and Aircraft on Page 2-13, special depreciation is not available for property placed in service after 2014 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 ac-counting 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. §1.446-1(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 SummaryDescription Code § Applies to qualified property

placed in service:

All taxpayers—50% (or 100%) 168(k) During 2008– 2019 (40% for 2018, 30% for 2019) 1

All taxpayers—30% 168(k)2 After 9/10/01 and before 5/6/03All taxpayers—50% 168(k)2 After 5/5/03 and before 1/1/053,4

NY Liberty Zone—30% 1400L After 9/10/01 and before 1/1/075

Gulf Opportunity Zone—50% 1400N After 8/27/05 and before 1/1/086,7

Kansas Disaster Area—50% 1400N After 5/4/07 and before 1/1/095

Other Disaster Areas—50% 168(n)After 12/31/07 for disasters occurring before 2010 (see Qualified Disaster Assistance Property on Page 2-14)

1 During 2008−2020, for certain long-production property (40% for 2019, 30% for 2020). [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, 2014. The computer qualified for 50% special depreciation, which was claimed on Asta’s 2014 tax return filed in March 2015. During November 2016, Asta realizes that it would have been better off had it not claimed spe-cial depreciation on the computer in 2014. 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 Regula-tions 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. 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. (See Rev. Proc. 2014-17, Rev. Proc. 2014-54, Rev. Proc. 2015-13 and Rev. Proc. 2015-14.)æ Practice Tip: As discussed further at Small Business Simpli-fied Method on Page 1-5, small business taxpayers (businesses with total assets of less than $10 million or average annual gross receipts of $10 million or less for the prior 3 tax years) may make certain tangible property changes in methods of accounting by taking into account only amounts paid or incurred, and dispositions, in tax years beginning after December 31, 2013. In addition, these small business taxpayers need not file Form 3115. (Rev. Proc. 2015-20)

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 ReturnChange Example

Mathematical, calculation or posting errors. [Reg §1.446-1(e)]

A number is transposed when the preparer enters it on the tax return.

Changing a depreciation method that has only been used on one return.1

In 2014, 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 2015 return has not been filed, an amended 2014 return can be filed to correct the error.

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 the useful life of an amortizable copyright asset that is not a Section 197 intangible.

A change in an asset’s placed-in-service date.

An asset was ordered and paid for in 2014, but was not delivered and placed in service until 2015. Any depreciation claimed in 2014 would be erroneous and can be corrected by filing an amended return.2

1 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)]


the intangibles acquired in the transaction are disposed of (includ-ing 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 Basis Increase to

= Remaining Section 197 IntangibleAdjusted Basis of

All Remaining Intangibles

Example: On November 1, 2013, 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, 2015, Tim sold the trademark for $65,000.

Selling price ..................................................................................... $65,000Cost basis ................................................................... $ 90,000Accumulated amortization ($90,000 ÷ 180 × 20) ....... < 10,000>Adjusted basis ................................................................................. < 80,000>Loss on sale .................................................................................... <$15,000>

The $15,000 loss cannot be recognized in 2015, but instead is added to the basis of the remaining intangibles as follows:

Patent Goodwill TotalCost basis ........................................... $100,000 $50,000 $150,000Accumulated amortization (Cost ÷ 180 × 20) .............................. < 11,111> < 5,556> < 16,667>Adjusted basis .................................... $ 88,889 $44,444 $133,333Additional basis(88,889 ÷ 133,333) × 15,000 .............. $ 10,000(44,444 ÷ 133,333) × 15,000 ......................................... $ 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 worth-less 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 trans-feror’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 IntangiblesA 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, 2010 for $60,000. Asset A cost $20,000 and Asset B cost $40,000. On January 1, 2015, 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 softWareComputer software includes all programs designed to cause a computer to perform a desired function. It also includes any data-base 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)]•Unavailabletothegeneralpublic,•Substantiallymodified(thatis,costofmodifications>25%ofthe

price of unmodified software, but at least $2,000) or•Subjecttoanexclusivelicense.Software that doesn’t meet these tests and any soft-ware 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 IntangibleRev. Proc. 2000-50

Asset Cost RecoverySoftware acquired as part of the cost of hardware—software’s cost is not separately stated.

Depreciated with the associated computer hardware under MACRS over a five-year life. Expensed as Section 179 property, if eligible.

Software is purchased separately or its cost is separately stated from any related hardware purchase. (Off-the-shelf software that is readily available for sale to the public.)

Depreciated straight-line over 36 months starting with the month placed in service. Note: May be eligible for Section 179 expensing if placed in service in a tax year beginning after 2002 and before 2015, and for special (bonus) depreciation if placed in service after 2007 and before 2020.

Software that is leased or licensed. Expensed currently (as rental expense).Software developed internally as a result of research or experimental expenditures.

Expensed or, at the taxpayer’s election, capitalized and amortized over 36 or 60 months.

Software with a useful life of less than one year.

Expensed currently.

IRS Ruling: A taxpayer purchased software and hired consultants to custom-ize 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


U Caution: Qualified timber property does not include property on which shelter belts or ornamental trees (for example, Christmas trees) are planted.

RecaptureFor 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 informa-tion 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.•Pilotmodel.•Process.•Technique.•Propertysimilartotheitemslistedabove.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.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:•Advertisingorpromotions.•Consumersurveys.•Efficiencysurveys.•Managementstudies.•Qualitycontroltesting.•Researchinconnectionwithliterary,historicalorsimilarprojects.•Theacquisitionofanother’spatent,model,productionorprocess.Deducting the costs. Research and experimental costs are de-ducted 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, 2014. 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 2015.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 amor-tized. 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 Janu-ary 1, 2015. 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 ExpendituresMethod Description Pros and Cons

Current Business Expense[IRC §174(a)]

Research and experimental costs that are ordinary and necessary business expenses can be deducted in the current 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.

• 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)]

Elect to Amortize[IRC §174(b)]

Amortization period begins with the month an economic benefit 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.

• 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.

Optional Write-Off 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.

• 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

tax leGislationThe following table identifies selected tax legislation enacted in 2009, 2010, 2011, 2013, and 2014 impacting 2015 and later tax returns.

Name of Act Public Law Number

Date of Enactment

Worker, Homeownership and Business Assistance Act of 2009

PL 111-92 11/6/09

Hiring Incentives to Restore Employment (HIRE) Act PL 111-147 3/18/10Patient Protection and Affordable Care Act PL 111-148 3/23/10Health Care and Education Reconciliation Act of 2010

PL 111-152 3/30/10

Small Business Jobs Act of 2010 PL 111-240 9/27/10Tax Relief Act of 2010 PL 111-312 12/17/10Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 (the 1099 Act)

PL 112-9 4/14/11

American Taxpayer Relief Act of 2012 PL 112-240 1/2/13Tax Increase Prevention Act of 2014 PL 113-295 12/19/14Protecting Americans From Tax Hikes Act of 2015 (PATH)

PL 114-113 12/18/15

Selected Tax Law Changes Affecting Business AssetsApplying to 2015 and Previous Tax Years

Item Effective Dates1 Page Provision in Effect for 2014 Provision in Effect for 2015Business PropertyIndian Reservation Property—Shorter Recovery Periods

Property placed in service before

2017

2-4 Shortened recovery periods for both regular tax and AMT apply to qualified Indian reservation property placed in service before 2015.

Expired provision: Qualifying property is required to be placed in service before 2017.

Motorsports Entertainment Complexes—Seven-Year Recovery Period


2017

2-3 Motorsports entertainment complexes are depreciated over a seven-year recovery period. [IRC §168(e)(3)(C)(ii) and IRC §168(i)(15)]


Qualified Leasehold, Restaurant and Retail Improvement Property—15-Year Recovery Period

Permanent for Property placed in service after 2014

2-1, 2-2, 2-3, 2-7,

2-12, 7-1, 7-9, 7-10

Qualified leasehold improvements, qualified restaurant property and qualified retail improvements are assigned a 15-year (straight-line) recovery period. [IRC §168(e)(3)(E)]

Expired provision: Qualified leasehold improvements and qualified restaurant property are designated 15-year MACRS property if placed in service after October 22, 2004 and before 2015. Qualified retail improvements are designated 15-year MACRS property if placed in service after 2008 and before 2015. If placed in service after 2014, all three types of property are assigned a 39-year (straight-line) recovery period.

Section 179—Election Can Be Revoked

Permanent for Tax years

beginning after 2014

5−9 Generally, a Section 179 election can only be revoked with IRS consent. However, the ability to irrevocably revoke a Section 179 election without IRS consent for any property applies to tax years beginning after 2002 and before 2015. [IRC §179(c)(2)]

Expired provision: The one-time ability to revoke a Section 179 election applies to tax years beginning after 2002 and before 2015.

Section 179—Expensing for Off-the-Shelf Software

Software placed in service in a tax

year beginning after 2014

5-5, 11-4

Off-the-shelf computer software is eligible for the Section 179 election if placed in service in a tax year beginning after 2002 and before 2015. [IRC §179(d)(1)(A)(ii)]

Expired provision: Off-the-shelf computer software is Section 179 property if placed in service in a tax year beginning after 2002 and before 2015.

Section 179—Increased Deduction Limit

Property placed in service after 20142

5-1 The Section 179 deduction and qualifying property limits are $500,000 and $2,000,000. [IRC §179(b)]

The limits remain $500,000 and $2,000,000 for property placed in service in a tax year beginning in 2015.

Section 179—Qualified Real Property

Property placed in service after 20142

5-6, 7-2

Taxpayers can claim the Section 179 deduction on up to $250,000 of qualified real property (qualified leasehold improvements, qualified restaurant property and qualified retail improvement property). [IRC §179(f)]

Expired provision: Qualified real property is Section 179 property if placed in service in a tax year beginning after 2009.

Section 179—Qualified Zone Property


2017

5-2 An enterprise zone business that places qualified zone property (defined in Code Section 1397A) in service in an empowerment zone before 2015 can increase its Section 179 deduction and qualifying 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.

Tab 13 TopicsTax Legislation ...................................................... Page 13-1Selected Tax Law Changes Affecting Business

Assets ................................................................. Page 13-1Glossary ................................................................ Page 13-3

and 2015

Continued on the next page


Special (Bonus) Depreciation—Allowance

Property acquired and placed in service before 2020 (before

2021 for certain property)

2-12, 6-7

The 50% special depreciation allowance is available for new qualified property additions. The following allowance rates apply, depending on when the qualified property is 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 – 2014: 50%For long-production-period property and certain aircraft, the placed-in-service dates are extended one year. Note: For 2008 – 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 50% special depreciation allowance is available for new qualified property additions through 2017. For long-production-period property and certain aircraft, the placed-in-service dates are extended one year.Note: For 2015, 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.

Special (Bonus) Depreciation—Corporate Election to Accelerate Certain Credits In Lieu of Claiming

Property placed in service in 2015–2017

(2016–2018 for certain property)

2-13 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, 2013 and 2014 (2011 – 2015 for long-production-period property and certain aircraft) [IRC §168(k)(4)(D)]. The election (available only to corporations) can be made for Round Two, Round Three or Round Four 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), 2012 (Round Three) or 2013 (Round Four). However, corporations that have already made this election for an earlier year can elect to not apply the election to Round Two, Round Three or Round Four property. Also, for Round Two, Round Three or Round Four property, the limit on unused research credits cannot be increased by making this election.

The election to forego the special depreciation allowance and increase the limits on certain credits is only available for long-production-period property and certain aircraft placed in service in 2015. This election is also available for long-production-period property and certain aircraft placed-in-service in 2016.

Tax CreditsEnergy Efficient Homes Qualified new

energy efficient homes acquired from an eligible

contractor before 2017

7-8 A credit is available to eligible contractors who construct or manufacture homes that meet certain energy efficiency standards. [IRC §45L(g)]

Expired provision: Eligible contractors are allowed a credit for qualified homes acquired before 2017 by a person for use as a residence.

Incremental Research Qualified research expenditures incurred after

2014

11-9 A credit is available for the cost of increasing research activities. [IRC §41]

Expired provision: A credit is available for the cost of increasing research activities before 2015.

Nonbusiness Energy Property

Qualified property placed in service

in 2015/2016

7-8 The $500 lifetime credit for qualified energy efficiency improvements and expenditures to a taxpayer’s principal residence is available for property placed in service in 2014. (IRC §25C)

Expired provision: A credit is available for property placed in service before 2017.

Plug-in Electric Vehicles—2- and 3-Wheeled Vehicles

Qualified property acquired after 2011

and before 2017 (but not in 2014)

6-12 Expired provision: Taxpayers who purchased a qualified 2- or 3-wheel plug-in electric vehicle in 2012 or 2013 could take a credit of up to $2,500. [IRC §30D(g)]

Expired provision. A credit is available only for 2- or 3-wheel plug-in electric vehicles purchased in 2015 or 2016.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.

Taxes and RatesLong-Term Capital Gains and Qualified Dividends Rate

2014 and later 8-2 The 15% maximum rate on long-term capital gains and qualified dividends applies to the extent taxable income does not exceed $406,750 (Single), $432,200 (HOH), $457,600 (MFJ or QW) and $228,800 (MFS). When taxable income exceeds those amounts, a 20% rate applies to long-term capital gains and qualified dividends (to the lesser of such gains and dividends or taxable income in excess of the threshold amount). These rates apply for regular tax and AMT. [IRC §1(h)]

The 15% maximum rate on long-term capital gains and qualified dividends applies to the extent taxable income does not exceed $413,200 (Single), $439,000 (HOH), $464,850 (MFJ or QW) and $232,425 (MFS). When taxable income exceeds those amounts, a 20% rate applies as explained in the previous column.

Net InvestmentIncome (NII) Tax

2014 and later 8-16 Individuals with modified AGI (MAGI) over $200,000 ($250,000 if MFJ or QW; $125,000 if MFS) are subject to a 3.8% additional tax on NII (or if less, on the excess of MAGI over the threshold amount). NII generally includes interest, dividends, royalties, rents, gross income from a passive trade or business and net gain from property 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)

Same as 2014. Unlike the long-term capital gain and qualified dividend taxable income threshold amounts referenced above, the NII tax MAGI threshold amounts are not adjusted for inflation.

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.


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.

EEconomic 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 des-ignations generally remained in effect through December 31, 2014.Parts of the following urban areas were listed as 2014 empower-ment zones in the 2014 instructions for Form 8844, Empowerment Zone Employment Credit:

Empowerment ZonesUrban 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

Note: The treatment of parts of Washington, DC as an empowerment zone ended after 2011.

Empowerment Zones (Continued)Rural Areas

• Desert Communities, CA (part of Riverside County)

• Southwest Georgia United, GA (part of Crisp County and all of Dooly County)

• Southernmost Illinois Delta, IL (parts of Alexander and Johnson Counties and all of Pulaski County)

• Kentucky Highlands, KY (part of Wayne County and all of Clinton and Jackson Counties)

• Aroostook County, ME (part of Aroostook County)

• Mid-Delta, MS (parts of Bolivar, Holmes, Humphreys, Leflore, Sunflower and Washington Counties)

• Griggs-Steele, ND (part of Griggs County and all of Steele County)

• Oglala Sioux Tribe, SD (part of Jackson County and all of Bennett and Shannon Counties)

• Middle Rio Grande FUTURO Communities, TX (parts of Dimmit, Maverick, Uvalde and Zavala Counties)

• Rio Grande Valley, TX (parts of Cameron, Hidalgo, Starr and Willacy 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.

FFair 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 deter-mined by the President to warrant assistance by the federal govern-ment 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 sat-isfaction of the debt.Fungible commodity: A commodity of a nature that one part may be used in place of another part.

GGeneral asset account (GAA): An elective grouping of depre-ciable assets that have the following attributes in common:•Depreciationmethod,•Recoveryperiod,•Convention(forexample,half-yearconvention)and•Taxyearinwhichtheywereplacedinservice.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 recov-ery 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.Grantor: The one who transfers property to another.Table continued in the next column

2016


OOperating 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.

PPassenger 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 gener-ally determines the depreciation method, recovery period and convention.

QQualified 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 6) Residential rental property.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 thatwerereleased,

•Removalofdebrisfrom,orthedemolitionofstructureson,damaged or destroyed business-related real property or

•Repairofdamagedbusiness-relatedproperty;3) Otherwise chargeable to a capital account and4) 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: •Tenantsbytheentirety.•Jointtenantswithrightofsurvivorshipifhusbandandwifeare

the only joint tenants. Qualified leasehold improvement property: A leasehold im-provement that meets the following four tests:•The improvement is toan interiorportionofabuilding (nota

common area).•Thebuildingisnonresidentialrealproperty.•Theimprovementwasmadepursuanttoaleasebythelessee,

sub-lessee or the lessor (landlord) to property to be occupied exclusively by the lessee or sub-lessee.

•Theimprovementisplacedinservicemorethanthreeyearsafterthe 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:•MACRSpropertywitharecoveryperiodof20years

or less.•Propertythatisanintegralpartofthegathering,

treatment or commercial distribution of water that, absent the special rules for NY Liberty Zone property, would be 20-year property.

•Anymunicipalsewer.•Computersoftwarethatisreadilyavailableforpur-

chase by the general public, is subject to a nonexclusive license and has not been substantially modified.

•Nonresidential real propertyand residential rental property tothe extent it rehabilitates or replaces real property damaged or destroyed as a result of the terrorist attacks of September 11, 2001.

Qualified real property: Certain real property that is eligible for up to $250,000 of Section 179 expense in 2010-2014. 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 gen-eral 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.

RReal property: Land, improvements and buildings thereon, includ-ing attached items and growing things.Recapture: To include as income an amount allowed or allowable as a deduction in a prior year.

2015

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