Publication 946
taxmap/pubs/p946-026.htm#en_us_publink1000107554Words you may need to know (see Glossary)
- Adjusted basis
- Amortization
- Basis
- Business/investment use
- Convention
- Declining balance method
- Disposition
- Exchange
- Nonresidential real property
- Placed in service
- Property class
- Recovery period
- Straight line method
To figure your depreciation deduction under MACRS, you first
determine the depreciation system, property class, placed in service date, basis
amount, recovery period, convention, and depreciation method that applies to
your property. Then, you are ready to figure your depreciation deduction. You
can figure it using a percentage table provided by the IRS, or you can figure it
yourself without using the table.
taxmap/pubs/p946-026.htm#en_us_publink1000107555To help you figure your deduction under MACRS, the IRS has established
percentage tables that incorporate the applicable convention and depreciation
method. These percentage tables are in Appendix A near the end of this
publication.
taxmap/pubs/p946-026.htm#en_us_publink1000107556Appendix A contains the
MACRS Percentage Table Guide,
which is designed to help you locate the correct percentage
table to use for depreciating your property. The percentage tables immediately
follow the guide.
taxmap/pubs/p946-026.htm#en_us_publink1000107557The following rules cover the use of the percentage tables.
- You must apply the rates in the percentage tables to your
property's unadjusted basis.
- You cannot use the percentage tables for a short tax year.
See
Figuring the Deduction for a Short Tax Year,
later, for information on the short tax year rules.
- Once you start using the percentage tables for any item of
property, you generally must continue to use them for the entire recovery period
of the property.
- You must stop using the tables if you adjust the basis of
the property for any reason other than—
- Depreciation allowed or allowable, or
- An addition or improvement to that property that is depreciated
as a separate item of property.
Basis adjustments other than those made due to the items listed
in (4) include an increase in basis for the recapture of a clean-fuel deduction
or credit and a reduction in basis for a casualty loss.
If you increase the basis of your property because of the recapture
of part or all of a deduction for clean-fuel vehicles or the credit for
clean-fuel vehicle refueling property placed in service before January 1, 2006,
you cannot continue to use the percentage tables. For the year of the adjustment
and the remaining recovery period, you must figure the depreciation deduction
yourself using the property's adjusted basis at the end of the year. See
Figuring the Deduction Without Using the Tables,
later.
taxmap/pubs/p946-026.htm#en_us_publink1000107559If you reduce the basis of your property because of a casualty,
you cannot continue to use the percentage tables. For the year of the adjustment
and the remaining recovery period, you must figure the depreciation yourself
using the property's adjusted basis at the end of the year. See
Figuring the Deduction Without Using the Tables,
later.
taxmap/pubs/p946-026.htm#en_us_publink1000107560On October 26, 2009, Sandra Elm, a calendar year taxpayer, bought
and placed in service in her business in the GO Zone a new item of 7-year
property. It cost $39,000 and she elected a section 179 deduction of $24,000.
She also took a special depreciation allowance of $7,500 [50% of $15,000
($39,000 − $24,000)]. Her unadjusted basis after the section 179 deduction
and special depreciation allowance was $7,500 ($15,000 − $7,500). She
figured her MACRS depreciation deduction using the percentage tables. For 2009,
her MACRS depreciation deduction was $268.
In July 2010, the property was vandalized and Sandra had a deductible
casualty loss of $3,000. She must adjust the property's basis for the casualty
loss, so she can no longer use the percentage tables. Her adjusted basis at the
end of 2010, before figuring her 2010 depreciation, is $4,232. She figures that
amount by subtracting the 2009 MACRS depreciation of $268 and the casualty loss
of $3,000 from the unadjusted basis of $7,500. She must now figure her
depreciation for 2010 without using the percentage tables.
taxmap/pubs/p946-026.htm#en_us_publink1000107561You must apply the table rates to your property's unadjusted
basis each year of the recovery period. Unadjusted basis is the same basis
amount you would use to figure gain on a sale, but you figure it without
reducing your original basis by any MACRS depreciation taken in earlier years.
However, you do reduce your original basis by other amounts, including the
following.
- Any amortization taken on the property.
- Any section 179 deduction claimed.
- Any special depreciation allowance taken on the property.
For business property you purchase during the year, the unadjusted
basis is its cost minus these and other applicable adjustments. If you trade
property, your unadjusted basis in the property received is the cash paid plus
the adjusted basis of the property traded minus these adjustments.
taxmap/pubs/p946-026.htm#en_us_publink1000107562You can use this worksheet to help you figure your depreciation
deduction using the percentage tables. Use a separate worksheet for each item of
property. Then, use the information from this worksheet to prepare Form 4562.
 | Do not use this worksheet for automobiles. Use the Depreciation
Worksheet for Passenger Automobiles in chapter 5. |
taxmap/pubs/p946-026.htm#id2010_id2010_w13081f01 |
| Part I
| | | 1. | MACRS system (GDS or ADS) | | | 2. | Property class | | | 3. | Date placed in service | | | 4. | Recovery period | | | 5. | Method and convention | | | 6. | Depreciation rate (from tables) | | | Part II
| | | 7. | Cost or other basis* | $ | | | | 8. | Business/investment use | | % | | | 9. | Multiply line 7 by line 8 | | $ | | 10. | Total claimed for section 179 deduction and other items | | $ | | 11. | Subtract line 10 from line 9. This is your tentative basis
for depreciation | | $ | | 12. | Multiply line 11 by .50 if the 50% special depreciation
allowance applies. Multiply line 11 by 1.00 if the 100% special depreciation
allowance applies. This is your special depreciation allowance. Enter -0- if
this is not the year you placed the property in service, the property is not
qualified property, or you elected not to claim a special allowance
| | $ | | 13. | Subtract line 12 from line 11. This is your basis for
depreciation | | | | 14. | Depreciation rate (from line 6) | | | | 15. | Multiply line 13 by line 14. This is your MACRS depreciation
deduction | | $ | | *If real estate, do not include cost (basis) of land. |
|
The following example shows how to figure your MACRS depreciation
deduction using the percentage tables and the MACRS worksheet.
taxmap/pubs/p946-026.htm#en_us_publink1000107564You bought office furniture (7-year property) for $10,000 and
placed it in service on August 11, 2010. You use the furniture only for
business. This is the only property you placed in service this year. You did not
elect a section 179 deduction and the property is not qualified property for
purposes of claiming a special depreciation allowance so your property's
unadjusted basis is its cost, $10,000. You use GDS and the half-year convention
to figure your depreciation. You refer to the
MACRS Percentage Table Guide
in Appendix A and find that you should use Table A-1. Multiply
your property's unadjusted basis each year by the percentage for 7-year property
given in Table A-1. You figure your depreciation deduction using the MACRS
worksheet as follows.
taxmap/pubs/p946-026.htm#en_us_publink100068774 |
| Part I
| | 1. | MACRS system (GDS or ADS) | GDS | | 2. | Property class | 7-year | | 3. | Date placed in service | 8/11/10 | | 4. | Recovery period | 7-Year | | 5. | Method and convention | 200%DB/Half-Year | | 6. | Depreciation rate (from tables) | .1429 | | Part II
| | 7. | Cost or other basis* | $10,000 | | | | 8. | Business/investment use | 100 | % | | | 9. | Multiply line 7 by line 8 | | $10,000 | | 10. | Total claimed for section 179 deduction and other items | | -0- | | 11. | Subtract line 10 from line 9. This is your tentative
basis for depreciation | | $10,000 | | 12. | Multiply line 11 by .50 if the 50% special depreciation
allowance applies. Multiply line 11 by 1.00 if the 100% special depreciation
allowance applies. This is your special depreciation allowance. Enter -0- if
this is not the year you placed the property in service, the property is not
qualified property, or you elected not to claim a special allowance
| | -0- | | 13. | Subtract line 12 from line 11. This is your basis for
depreciation | | $10,000 | | 14. | Depreciation rate (from line 6) | | .1429 | | 15. | Multiply line 13 by line 14. This is your MACRS depreciation
deduction | | $1,429 | | *If real estate, do not include cost (basis) of land.
|
|
If there are no adjustments to the basis of the property other
than depreciation, your depreciation deduction for each subsequent year of the
recovery period will be as follows.
| Year | | Basis | Percentage | Deduction |
| 2011 | $ | 10,000 | 24.49% | | $2,449 | |
| 2012 | | 10,000 | 17.49 | | 1,749 | |
| 2013 | | 10,000 | 12.49 | | 1,249 | |
| 2014 | | 10,000 | 8.93 | | 893 | |
| 2015 | | 10,000 | 8.92 | | 892 | |
| 2016 | | 10,000 | 8.93 | | 893 | |
| 2017 | | 10,000 | 4.46 | | 446 | |
The following examples are provided to show you how to use the
percentage tables. In both examples, assume the following.
- You use the property only for business.
- You use the calendar year as your tax year.
- You use GDS for all the properties.
You bought a building and land for $120,000 and placed it in
service on March 8. The sales contract showed that the building cost $100,000
and the land cost $20,000. It is nonresidential real property. The building's
unadjusted basis is its original cost, $100,000.
You refer to the
MACRS Percentage Table Guide
in Appendix A and find that you should use Table A-7a. March
is the third month of your tax year, so multiply the building's unadjusted
basis, $100,000, by the percentages for the third month in Table A-7a. Your
depreciation deduction for each of the first 3 years is as follows:
| Year | | Basis | Percentage | Deduction |
| 1st | $ | 100,000 | 2.033% | | $2,033 | |
| 2nd | | 100,000 | 2.564 | | 2,564 | |
| 3rd | | 100,000 | 2.564 | | 2,564 | |
During the year, you bought a machine (7-year property) for $4,000,
office furniture (7-year property) for $1,000, and a computer (5-year property)
for $5,000. You placed the machine in service in January, the furniture in
September, and the computer in October. You do not elect a section 179 deduction
and none of these items is qualified property for purposes of claiming a special
depreciation allowance.
You placed property in service during the last 3 months of the
year, so you must first determine if you have to use the mid-quarter convention.
The total bases of all property you placed in service during the year is
$10,000. The $5,000 basis of the computer, which you placed in service during
the last 3 months (the fourth quarter) of your tax year, is more than 40% of the
total bases of all property ($10,000) you placed in service during the year.
Therefore, you must use the mid-quarter convention for all three items.
You refer to the
MACRS Percentage Table Guide
in Appendix A to determine which table you should use under
the mid-quarter convention. The machine is 7-year property placed in service in
the first quarter, so you use Table A-2. The furniture is 7-year property placed
in service in the third quarter, so you use Table A-4. Finally, because the
computer is 5-year property placed in service in the fourth quarter, you use
Table A-5. Knowing what table to use for each property, you figure the
depreciation for the first 2 years as follows.
| Year | Property | Basis | Percentage | Deduction |
| 1st | Machine | $4,000 | 25.00 | $1,000 | |
| 2nd | Machine | 4,000 | 21.43 | 857 | |
| 1st | Furniture | 1,000 | 10.71 | 107 | |
| 2nd | Furniture | 1,000 | 25.51 | 255 | |
| 1st | Computer | 5,000 | 5.00 | 250 | |
| 2nd | Computer | 5,000 | 38.00 | 1,900 | |
If you sell or otherwise dispose of your property before the
end of its recovery period, your depreciation deduction for the year of the
disposition will be only part of the depreciation amount for the full year. You
have disposed of your property if you have permanently withdrawn it from use in
your business or income-producing activity because of its sale, exchange,
retirement, abandonment, involuntary conversion, or destruction. After you
figure the full-year depreciation amount, figure the deductible part using the
convention that applies to the property.
taxmap/pubs/p946-026.htm#en_us_publink1000107569For property for which you used a half-year convention, the depreciation
deduction for the year of the disposition is half the depreciation determined
for the full year.
taxmap/pubs/p946-026.htm#en_us_publink1000107570For property for which you used the mid-quarter convention, figure
your depreciation deduction for the year of the disposition by multiplying a
full year of depreciation by the percentage listed below for the quarter in
which you disposed of the property.
| Quarter | Percentage |
| First | 12.5% |
| Second | 37.5 |
| Third | 62.5 |
| Fourth | 87.5 |
On December 2, 2007, you placed in service an item of 5-year
property costing $10,000. You did not claim a section 179 deduction and the
property does not qualify for a special depreciation allowance. Your unadjusted
basis for the property was $10,000. You used the mid-quarter convention because
this was the only item of business property you placed in service in 2007 and it
was placed in service during the last 3 months of your tax year. Your property
is in the 5-year property class, so you used Table A-5 to figure your
depreciation deduction. Your deductions for 2007, 2008, and 2009 were $500 (5%
of $10,000), $3,800 (38% of $10,000), and $2,280 (22.80% of $10,000). You
disposed of the property on April 6, 2010. To determine your depreciation
deduction for 2010, first figure the deduction for the full year. This is $1,368
(13.68% of $10,000). April is in the second quarter of the year, so you multiply
$1,368 by 37.5% to get your depreciation deduction of $513 for 2010.
taxmap/pubs/p946-026.htm#en_us_publink1000107572If you dispose of residential rental or nonresidential real property,
figure your depreciation deduction for the year of the disposition by
multiplying a full year of depreciation by a fraction. The numerator of the
fraction is the number of months (including partial months) in the year that the
property is considered in service. The denominator is 12.
taxmap/pubs/p946-026.htm#en_us_publink1000107573On July 2, 2008, you purchased and placed in service residential
rental property. The property cost $100,000, not including the cost of land. You
used Table A-6 to figure your MACRS depreciation for this property. You sold the
property on March 2, 2010. You file your tax return based on the calendar year.
A full year of depreciation for 2010 is $3,636. This is $100,000
multiplied by .03636 (the percentage for the seventh month of the third recovery
year) from Table A-6. You then apply the mid-month convention for the 21/2
months of use in 2010. Treat the month of disposition as one-half month of use.
Multiply $3,636 by the fraction, 2.5 over 12, to get your 2010 depreciation
deduction of $757.50.
taxmap/pubs/p946-026.htm#en_us_publink1000107574Instead of using the rates in the percentage tables to figure
your depreciation deduction, you can figure it yourself. Before making the
computation each year, you must reduce your adjusted basis in the property by
the depreciation claimed the previous year.
| Figuring MACRS deductions without using the tables generally
will result in a slightly different amount than using the tables. |
taxmap/pubs/p946-026.htm#en_us_publink1000107576When using a declining balance method, you apply the same depreciation
rate each year to the adjusted basis of your property. You must use the
applicable convention for the first tax year and you must switch to the straight
line method beginning in the first year for which it will give an equal or
greater deduction. The straight line method is explained later.
You figure depreciation for the year you place property in service
as follows.
- Multiply your adjusted basis in the property by the declining
balance rate.
- Apply the applicable convention.
You figure depreciation for all other years (before the year
you switch to the straight line method) as follows.
- Reduce your adjusted basis in the property by the depreciation
allowed or allowable in earlier years.
- Multiply this new adjusted basis by the same declining balance
rate used in earlier years.
If you dispose of property before the end of its recovery period,
see
Using the Applicable Convention,
later, for information on how to figure depreciation for the
year you dispose of it.
Figuring depreciation under the declining balance method and
switching to the straight line method is illustrated in
Example 1, later, under
Examples.
taxmap/pubs/p946-026.htm#en_us_publink1000107577You figure your declining balance rate by dividing the specified
declining balance percentage (150% or 200% changed to a decimal) by the number
of years in the property's recovery period. For example, for 3-year property
depreciated using the 200% declining balance method, divide 2.00 (200%) by 3 to
get 0.6667, or a 66.67% declining balance rate. For 15-year property depreciated
using the 150% declining balance method, divide 1.50 (150%) by 15 to get 0.10,
or a 10% declining balance rate.
The following table shows the declining balance rate for each
property class and the first year for which the straight line method gives an
equal or greater deduction.
| Property Class | Method | Declining Balance Rate | Year |
|---|
| 3-year | 200% DB | 66.667% | 3rd |
| 5-year | 200% DB | 40.0 | 4th |
| 7-year | 200% DB | 28.571 | 5th |
| 10-year | 200% DB | 20.0 | 7th |
| 15-year | 150% DB | 10.0 | 7th |
| 20-year | 150% DB | 7.5 | 9th |
When using the straight line method, you apply a different depreciation
rate each year to the adjusted basis of your property. You must use the
applicable convention in the year you place the property in service and the year
you dispose of the property.
You figure depreciation for the year you place property in service
as follows.
- Multiply your adjusted basis in the property by the straight
line rate.
- Apply the applicable convention.
You figure depreciation for all other years (including the year
you switch from the declining balance method to the straight line method) as
follows.
- Reduce your adjusted basis in the property by the depreciation
allowed or allowable in earlier years (under any method).
- Determine the depreciation rate for the year.
- Multiply the adjusted basis figured in (1) by the depreciation
rate figured in (2).
If you dispose of property before the end of its recovery period,
see
Using the Applicable Convention, later, for information on how to figure depreciation for the
year you dispose of it.
taxmap/pubs/p946-026.htm#en_us_publink1000107579You determine the straight line depreciation rate for any tax
year by dividing the number 1 by the years remaining in the recovery period at
the beginning of that year. When figuring the number of years remaining, you
must take into account the convention used in the year you placed the property
in service. If the number of years remaining is less than 1, the depreciation
rate for that tax year is 1.0 (100%).
taxmap/pubs/p946-026.htm#en_us_publink1000107580The applicable convention (discussed earlier under
Which Convention Applies) affects how you figure your depreciation deduction for the
year you place your property in service and for the year you dispose of it. It
determines how much of the recovery period remains at the beginning of each
year, so it also affects the depreciation rate for property you depreciate under
the straight line method. See
Straight line rate
in the previous discussion. Use the applicable convention as explained in the
following discussions.
taxmap/pubs/p946-026.htm#en_us_publink1000107581If this convention applies, you deduct a half-year of depreciation
for the first year and the last year that you depreciate the property. You
deduct a full year of depreciation for any other year during the recovery
period.
Figure your depreciation deduction for the year you place the
property in service by dividing the depreciation for a full year by 2. If you
dispose of the property before the end of the recovery period, figure your
depreciation deduction for the year of the disposition the same way. If you hold
the property for the entire recovery period, your depreciation deduction for the
year that includes the final 6 months of the recovery period is the amount of
your unrecovered basis in the property.
taxmap/pubs/p946-026.htm#en_us_publink1000107582If this convention applies, the depreciation you can deduct for
the first year you depreciate the property depends on the quarter in which you
place the property in service.
A quarter of a full 12-month tax year is a period of 3 months.
The first quarter in a year begins on the first day of the tax year. The second
quarter begins on the first day of the fourth month of the tax year. The third
quarter begins on the first day of the seventh month of the tax year. The fourth
quarter begins on the first day of the tenth month of the tax year. A calendar
year is divided into the following quarters.
| Quarter |
Months |
| First | January, February, March |
| Second | April, May, June |
| Third | July, August, September |
| Fourth | October, November, December |
Figure your depreciation deduction for the year you place the
property in service by multiplying the depreciation for a full year by the
percentage listed below for the quarter you place the property in service.
| Quarter | Percentage |
|---|
| First | 87.5% |
| Second | 62.5 |
| Third | 37.5 |
| Fourth | 12.5 |
If you dispose of the property before the end of the recovery
period, figure your depreciation deduction for the year of the disposition by
multiplying a full year of depreciation by the percentage listed below for the
quarter you dispose of the property.
| Quarter | Percentage |
|---|
| First | 12.5% |
| Second | 37.5 |
| Third | 62.5 |
| Fourth | 87.5 |
If you hold the property for the entire recovery period, your
depreciation deduction for the year that includes the final quarter of the
recovery period is the amount of your unrecovered basis in the property.
taxmap/pubs/p946-026.htm#en_us_publink1000107583If this convention applies, the depreciation you can deduct for
the first year that you depreciate the property depends on the month in which
you place the property in service. Figure your depreciation deduction for the
year you place the property in service by multiplying the depreciation for a
full year by a fraction. The numerator of the fraction is the number of full
months in the year that the property is in service plus
1/2 (or 0.5). The denominator is 12.
If you dispose of the property before the end of the recovery
period, figure your depreciation deduction for the year of the disposition the
same way. If you hold the property for the entire recovery period, your
depreciation deduction for the year that includes the final month of the
recovery period is the amount of your unrecovered basis in the property.
taxmap/pubs/p946-026.htm#en_us_publink1000107584You use the calendar year and place nonresidential real property
in service in August. The property is in service 4 full months (September,
October, November, and December). Your numerator is 4.5 (4 full months plus
0.5). You multiply the depreciation for a full year by 4.5/12, or 0.375.
taxmap/pubs/p946-026.htm#en_us_publink1000107585The following examples show how to figure depreciation under
MACRS without using the percentage tables. Figures are rounded for purposes of
the examples. Assume for all the examples that you use a calendar year as your
tax year.
taxmap/pubs/p946-026.htm#en_us_publink1000107586Example 1—200% DB method and half-year convention.(p48)
In February, you placed in service depreciable property with
a 5-year recovery period and a basis of $1,000. You do not elect to take the
section 179 deduction and the property does not qualify for a special
depreciation allowance. You use GDS and the 200% declining balance (DB) method
to figure your depreciation. When the straight line (SL) method results in an
equal or larger deduction, you switch to the SL method. You did not place any
property in service in the last 3 months of the year, so you must use the
half-year convention.
First year.
You figure the depreciation rate under the 200% DB method by
dividing 2 (200%) by 5 (the number of years in the recovery period). The result
is 40%. You multiply the adjusted basis of the property ($1,000) by the 40% DB
rate. You apply the half-year convention by dividing the result ($400) by 2.
Depreciation for the first year under the 200% DB method is $200.
You figure the depreciation rate under the straight line (SL)
method by dividing 1 by 5, the number of years in the recovery period. The
result is 20%.You multiply the adjusted basis of the property ($1,000) by the
20% SL rate. You apply the half-year convention by dividing the result ($200) by
2. Depreciation for the first year under the SL method is $100.
The DB method provides a larger deduction, so you deduct the
$200 figured under the 200% DB method.
Second year.
You reduce the adjusted basis ($1,000) by the depreciation claimed
in the first year ($200). You multiply the result ($800) by the DB rate (40%).
Depreciation for the second year under the 200% DB method is $320.
You figure the SL depreciation rate by dividing 1 by 4.5, the
number of years remaining in the recovery period. (Based on the half-year
convention, you used only half a year of the recovery period in the first year.)
You multiply the reduced adjusted basis ($800) by the result (22.22%).
Depreciation under the SL method for the second year is $178.
The DB method provides a larger deduction, so you deduct the
$320 figured under the 200% DB method.
Third year.
You reduce the adjusted basis ($800) by the depreciation claimed
in the second year ($320). You multiply the result ($480) by the DB rate (40%).
Depreciation for the third year under the 200% DB method is $192.
You figure the SL depreciation rate by dividing 1 by 3.5. You
multiply the reduced adjusted basis ($480) by the result (28.57%). Depreciation
under the SL method for the third year is $137.
The DB method provides a larger deduction, so you deduct the
$192 figured under the 200% DB method.
Fourth year.
You reduce the adjusted basis ($480) by the depreciation claimed
in the third year ($192). You multiply the result ($288) by the DB rate (40%).
Depreciation for the fourth year under the 200% DB method is $115.
You figure the SL depreciation rate by dividing 1 by 2.5. You
multiply the reduced adjusted basis ($288) by the result (40%). Depreciation
under the SL method for the fourth year is $115.
The SL method provides an equal deduction, so you switch to the
SL method and deduct the $115.
Fifth year.
You reduce the adjusted basis ($288) by the depreciation claimed
in the fourth year ($115) to get the reduced adjusted basis of $173. You figure
the SL depreciation rate by dividing 1 by 1.5. You multiply the reduced adjusted
basis ($173) by the result (66.67%). Depreciation under the SL method for the
fifth year is $115.
Sixth year.
You reduce the adjusted basis ($173) by the depreciation claimed
in the fifth year ($115) to get the reduced adjusted basis of $58. There is less
than one year remaining in the recovery period, so the SL depreciation rate for
the sixth year is 100%. You multiply the reduced adjusted basis ($58) by 100% to
arrive at the depreciation deduction for the sixth year ($58).
taxmap/pubs/p946-026.htm#en_us_publink1000107587Example 2—SL method and mid-month convention.(p49)
In January, you bought and placed in service a building for $100,000
that is nonresidential real property with a recovery period of 39 years. The
adjusted basis of the building is its cost of $100,000. You use GDS, the
straight line (SL) method, and the mid-month convention to figure your
depreciation.
First year.
You figure the SL depreciation rate for the building by dividing 1 by 39 years.
The result is .02564. The depreciation for a full year is $2,564 ($100,000
× .02564). Under the mid-month convention, you treat the property as placed
in service in the middle of January. You get 11.5 months of depreciation for the
year. Expressed as a decimal, the fraction of 11.5 months divided by 12 months
is .958. Your first-year depreciation for the building is $2,456 ($2,564 ×
.958).
Second year.
You subtract $2,456 from $100,000 to get your adjusted basis of $97,544 for the
second year. The SL rate is .02629. This is 1 divided by the remaining recovery
period of 38.042 years (39 years reduced by 11.5 months or .958 year). Your
depreciation for the building for the second year is $2,564 ($97,544 ×
.02629).
Third year.
The adjusted basis is $94,980 ($97,544 − $2,564). The SL rate is .027 (1
divided by 37.042 remaining years). Your depreciation for the third year is
$2,564 ($94,980 × .027).
taxmap/pubs/p946-026.htm#en_us_publink1000107588Example 3—200% DB method and mid-quarter convention.(p49)
During the year, you bought and placed in service in your business
the following items.
| Item | Month Placed
in Service | Cost |
| Safe | January | $4,000 |
| Office furniture | September | 1,000 |
| Computer (not listed property) | October | 5,000 |
You do not elect a section 179 deduction and these items do
not qualify for a special depreciation allowance. You use GDS and the 200%
declining balance (DB) method to figure the depreciation. The total bases of all
property you placed in service this year is $10,000. The basis of the computer
($5,000) is more than 40% of the total bases of all property placed in service
during the year ($10,000), so you must use the mid-quarter convention. This
convention applies to all three items of property. The safe and office furniture
are 7-year property and the computer is 5-year property.
First and second year depreciation for safe.
The 200% DB rate for 7-year property is .28571. You determine this by dividing
2.00 (200%) by 7 years. The depreciation for the safe for a full year is $1,143
($4,000 × .28571). You placed the safe in service in the first quarter of
your tax year, so you multiply $1,143 by 87.5% (the mid-quarter percentage for
the first quarter). The result, $1,000, is your deduction for depreciation on
the safe for the first year.
For the second year, the adjusted basis of the safe is $3,000.
You figure this by subtracting the first year's depreciation ($1,000) from the
basis of the safe ($4,000). Your depreciation deduction for the second year is
$857
($3,000 × .28571).
First and second year depreciation for furniture.
The furniture is also 7-year property, so you use the same 200% DB rate of
.28571. You multiply the basis of the furniture ($1,000) by .28571 to get the
depreciation of $286 for the full year. You placed the furniture in service in
the third quarter of your tax year, so you multiply $286 by 37.5% (the
mid-quarter percentage for the third quarter). The result, $107, is your
deduction for depreciation on the furniture for the first year.
For the second year, the adjusted basis of the furniture is $893.
You figure this by subtracting the first year's depreciation ($107) from the
basis of the furniture ($1,000). Your depreciation for the second year is $255
($893 × .28571).
First and second year depreciation for computer.
The 200% DB rate for 5-year property is .40. You determine this by dividing 2.00
(200%) by 5 years. The depreciation for the computer for a full year is $2,000
($5,000 × .40). You placed the computer in service in the fourth quarter of
your tax year, so you multiply the $2,000 by 12.5% (the mid-quarter percentage
for the fourth quarter). The result, $250, is your deduction for depreciation on
the computer for the first year.
For the second year, the adjusted basis of the computer is $4,750.
You figure this by subtracting the first year's depreciation ($250) from the
basis of the computer ($5,000). Your depreciation deduction for the second year
is $1,900 ($4,750 × .40).
taxmap/pubs/p946-026.htm#en_us_publink1000107589Example 4—200% DB method and half-year convention.(p49)
Last year, in July, you bought and placed in service in your
business a new item of 7-year property. This was the only item of property you
placed in service last year. The property cost $39,000 and you elected a $24,000
section 179 deduction. You also took a special depreciation allowance of $7,500.
Your unadjusted basis for the property is $7,500. Because you did not place any
property in service in the last 3 months of your tax year, you used the
half-year convention. You figured your deduction using the percentages in Table
A-1 for 7-year property. Last year, your depreciation was $1,072 ($7,500 ×
14.29%).
In July of this year, your property was vandalized. You had a
deductible casualty loss of $3,000. You spent $3,500 to put the property back in
operational order. Your adjusted basis at the end of this year is $6,928. You
figured this by first subtracting the first year's depreciation ($1,072) and the
casualty loss ($3,000) from the unadjusted basis of $7,500. To this amount
($3,428), you then added the $3,500 repair cost.
You cannot use the table percentages to figure your depreciation
for this property for this year because of the adjustments to basis. You must
figure the deduction yourself. You determine the DB rate by dividing 2.00 (200%)
by 7 years. The result is .28571 or 28.571%. You multiply the adjusted basis of
your property ($6,928) by the declining balance rate of .28571 to get your
depreciation deduction of $1,979 for this year.
taxmap/pubs/p946-026.htm#en_us_publink1000107590If your property has a carryover basis because you acquired it
in a nontaxable transfer such as a like-kind exchange or involuntary conversion,
you must generally figure depreciation for the property as if the transfer had
not occurred. However, see
Like-kind exchanges and involuntary conversions, earlier, in chapter 3 under
How Much Can You Deduct and
Property Acquired in a Like-kind Exchange or Involuntary Conversion, next.
taxmap/pubs/p946-026.htm#en_us_publink1000107591You generally must depreciate the carryover basis of property
acquired in a like-kind exchange or involuntary conversion over the remaining
recovery period of the property exchanged or involuntarily converted. You also
generally continue to use the same depreciation method and convention used for
the exchanged or involuntarily converted property. This applies only to acquired
property with the same or a shorter recovery period and the same or more
accelerated depreciation method than the property exchanged or involuntarily
converted. The excess basis (the part of the acquired property's basis that
exceeds its carryover basis), if any, of the acquired property is treated as
newly placed in service property.
For acquired property that has a longer recovery period or less
accelerated depreciation method than the exchanged or involuntarily converted
property, you generally must depreciate the carryover basis of the acquired
property as if it were placed in service in the same tax year as the exchanged
or involuntarily converted property. You also generally continue to use the
longer recovery period and less accelerated depreciation method of the acquired
property.
If the MACRS property you acquired in the exchange or involuntary
conversion is qualified property, discussed earlier in chapter 3 under
What Is Qualified Property, you can claim a special depreciation allowance on the carryover
basis.
Special rules apply to vehicles acquired in a trade-in. For information
on how to figure depreciation for a vehicle acquired in a trade-in that is
subject to the passenger automobile limits, see
Deductions For Passenger Automobiles Acquired in a Trade-in under
Do the Passenger Automobile Limits Apply in chapter 5.
taxmap/pubs/p946-026.htm#en_us_publink1000107592Instead of using the above rules, you can elect, for depreciation
purposes, to treat the adjusted basis of the exchanged or involuntarily
converted property as if disposed of at the time of the exchange or involuntary
conversion. Treat the carryover basis and excess basis, if any, for the acquired
property as if placed in service the later of the date you acquired it or the
time of the disposition of the exchanged or involuntarily converted property.
The depreciable basis of the new property is the adjusted basis of the exchanged
or involuntarily converted property plus any additional amount you paid for it.
The election, if made, applies to both the acquired property and the exchanged
or involuntarily converted property. This election does not affect the amount of
gain or loss recognized on the exchange or involuntary conversion.
taxmap/pubs/p946-026.htm#en_us_publink1000107593You must make the election on a timely filed return (including
extensions) for the year of replacement. The election must be made separately by
each person acquiring replacement property. In the case of a partnership, S
corporation, or consolidated group, the election is made by the partnership, by
the S corporation, or by the common parent of a consolidated group,
respectively. Once made, the election may not be revoked without IRS consent.
For more information and special rules, see the Instructions
for Form 4562.
taxmap/pubs/p946-026.htm#en_us_publink1000107594You must depreciate MACRS property acquired by a corporation
or partnership in certain nontaxable transfers over the property's remaining
recovery period in the transferor's hands, as if the transfer had not occurred.
You must continue to use the same depreciation method and convention as the
transferor. You can depreciate the part of the property's basis that exceeds its
carryover basis (the transferor's adjusted basis in the property) as newly
purchased MACRS property.
The nontaxable transfers covered by this rule include the following.
- A distribution in complete liquidation of a subsidiary.
- A transfer to a corporation controlled by the transferor.
- An exchange of property solely for corporate stock or securities
in a reorganization.
- A contribution of property to a partnership in exchange for
a partnership interest.
- A partnership distribution of property to a partner.
You cannot use the MACRS percentage tables to determine depreciation
for a short tax year. A short tax year is any tax year with less than 12 full
months. This section discusses the rules for determining the depreciation
deduction for property you place in service or dispose of in a short tax year.
It also discusses the rules for determining depreciation when you have a short
tax year during the recovery period (other than the year the property is placed
in service or disposed of).
For more information on figuring depreciation for a short tax
year, see Revenue Procedure 89-15, 1989-1 C.B. 816.
taxmap/pubs/p946-026.htm#en_us_publink1000107596The applicable convention establishes the date property is treated
as placed in service and disposed of. Depreciation is allowable only for that
part of the tax year the property is treated as in service. The recovery period
begins on the placed in service date determined by applying the convention. The
remaining recovery period at the beginning of the next tax year is the full
recovery period less the part for which depreciation was allowable in the first
tax year.
The following discussions explain how to use the applicable convention
in a short tax year.
taxmap/pubs/p946-026.htm#en_us_publink1000107597Under the mid-month convention, you always treat your property
as placed in service or disposed of on the midpoint of the month it is placed in
service or disposed of. You apply this rule without regard to your tax year.
taxmap/pubs/p946-026.htm#en_us_publink1000107598Under the half-year convention, you treat property as placed
in service or disposed of on the midpoint of the tax year it is placed in
service or disposed of.
taxmap/pubs/p946-026.htm#en_us_publink1000107599For a short tax year beginning on the first day of a month or
ending on the last day of a month, the tax year consists of the number of months
in the tax year. If the short tax year includes part of a month, you generally
include the full month in the number of months in the tax year. You determine
the midpoint of the tax year by dividing the number of months in the tax year by
2. For the half-year convention, you treat property as placed in service or
disposed of on either the first day or the midpoint of a month.
For example, a short tax year that begins on June 20 and ends
on December 31 consists of 7 months. You use only full months for this
determination, so you treat the tax year as beginning on June 1 instead of June
20. The midpoint of the tax year is the middle of September (31/2
months from the beginning of the tax year). You treat property as placed in
service or disposed of on this midpoint.
taxmap/pubs/p946-026.htm#en_us_publink1000107600Tara Corporation, a calendar year taxpayer, was incorporated
on March 15. For purposes of the half-year convention, it has a short tax year
of 10 months, ending on December 31, 2010. During the short tax year, Tara
placed property in service for which it uses the half-year convention. Tara
treats this property as placed in service on the first day of the sixth month of
the short tax year, or August 1, 2010.
taxmap/pubs/p946-026.htm#en_us_publink1000107601For a short tax year not beginning on the first day of a month
and not ending on the last day of a month, the tax year consists of the number
of days in the tax year. You determine the midpoint of the tax year by dividing
the number of days in the tax year by 2. For the half-year convention, you treat
property as placed in service or disposed of on either the first day or the
midpoint of a month. If the result of dividing the number of days in the tax
year by 2 is not the first day or the midpoint of a month, you treat the
property as placed in service or disposed of on the nearest preceding first day
or midpoint of a month.
taxmap/pubs/p946-026.htm#en_us_publink1000107602To determine if you must use the mid-quarter convention, compare
the basis of property you place in service in the last 3 months of your tax year
to that of property you place in service during the full tax year. The length of
your tax year does not matter. If you have a short tax year of 3 months or less,
use the mid-quarter convention for all applicable property you place in service
during that tax year.
You treat property under the mid-quarter convention as placed
in service or disposed of on the midpoint of the quarter of the tax year in
which it is placed in service or disposed of. Divide a short tax year into 4
quarters and determine the midpoint of each quarter.
For a short tax year of 4 or 8 full calendar months, determine
quarters on the basis of whole months. The midpoint of each quarter is either
the first day or the midpoint of a month. Treat property as placed in service or
disposed of on this midpoint.
To determine the midpoint of a quarter for a short tax year of
other than 4 or 8 full calendar months, complete the following steps.
- Determine the number of days in your short tax year.
- Determine the number of days in each quarter by dividing the
number of days in your short tax year
by 4. - Determine the midpoint of each quarter by dividing the number
of days in each quarter by 2.
If the result of (3) gives you a midpoint of a quarter that is
on a day other than the first day or midpoint of a month, treat the property as
placed in service or disposed of on the nearest preceding first day or midpoint
of that month.
taxmap/pubs/p946-026.htm#en_us_publink1000107603Tara Corporation, a calendar year taxpayer, was incorporated
and began business on March 15. It has a short tax year of 9
1/
2
months, ending on December 31. During December, it placed property in service
for which it must use the mid-quarter convention. This is a short tax year of
other than 4 or 8 full calendar months, so it must determine the midpoint of
each quarter.
- First, it determines that its short tax year beginning March
15 and ending December 31 consists of 292 days.
- Next, it divides 292 by 4 to determine the length of each
quarter, 73 days.
- Finally, it divides 73 by 2 to determine the midpoint of each
quarter, the 37th day.
The following table shows the quarters of Tara Corporation's
short tax year, the midpoint of each quarter, and the date in each quarter that
Tara must treat its property as placed in service.
| Quarter | Midpoint | Placed in Service |
|---|
| 3/15 – 5/26 | 4/20 | 4/15 |
| 5/27 – 8/07 | 7/02 | 7/01 |
| 8/08 – 10/19 | 9/13 | 9/01 |
| 10/20 – 12/31 | 11/25 | 11/15 |
The last quarter of the short tax year begins on October 20,
which is 73 days from December 31, the end of the tax year. The 37th day of the
last quarter is November 25, which is the midpoint of the quarter. November 25
is not the first day or the midpoint of November, so Tara Corporation must treat
the property as placed in service in the middle of November (the nearest
preceding first day or midpoint of that month).
taxmap/pubs/p946-026.htm#en_us_publink1000107604To figure your MACRS depreciation deduction for the short tax
year, you must first determine the depreciation for a full tax year. You do this
by multiplying your basis in the property by the applicable depreciation rate.
Then, determine the depreciation for the short tax year. Do this by multiplying
the depreciation for a full tax year by a fraction. The numerator (top number)
of the fraction is the number of months (including parts of a month) the
property is treated as in service during the tax year (applying the applicable
convention). The denominator (bottom number) is 12. See
Depreciation After a Short Tax Year, later, for information on how to figure depreciation in later
years.
taxmap/pubs/p946-026.htm#en_us_publink1000107605Example 1—half-year convention.(p52)
Tara Corporation, with a short tax year beginning March 15 and
ending December 31, placed in service on March 16 an item of 5-year property
with a basis of $1,000. This is the only property the corporation placed in
service during the short tax year. Tara does not elect to claim a section 179
deduction and the property does not qualify for a special depreciation
allowance. The depreciation method for this property is the 200% declining
balance method. The depreciation rate is 40% and Tara applies the half-year
convention.
Tara treats the property as placed in service on
August 1. The determination of this August 1 date is explained
in the example illustrating the half-year convention under
Using the Applicable Convention in a Short Tax Year, earlier. Tara is allowed 5 months of depreciation for the
short tax year that consists of 10 months. The corporation first multiplies the
basis ($1,000) by 40% (the declining balance rate) to get the depreciation for a
full tax year of $400. The corporation then multiplies $400 by
5/12 to get the short tax year depreciation of $167.
taxmap/pubs/p946-026.htm#en_us_publink1000107606Example 2—mid-quarter convention.(p52)
Tara Corporation, with a short tax year beginning March 15 and
ending on December 31, placed in service on October 16 an item of 5-year
property with a basis of $1,000. Tara does not elect to claim a section 179
deduction and the property does not qualify for a special depreciation
allowance. The depreciation method for this property is the 200% declining
balance method. The depreciation rate is 40%. The corporation must apply the
mid-quarter convention because the property was the only item placed in service
that year and it was placed in service in the last 3 months of the tax year.
Tara treats the property as placed in service on September 1.
This date is shown in the table provided in the example illustrating the
mid-quarter convention under
Using the Applicable Convention in a Short Tax Year, earlier, for property that Tara Corporation placed in service
during the quarter that begins on August 8 and ends on October 19. Under MACRS,
Tara is allowed 4 months of depreciation for the short tax year that consists of
10 months. The corporation first multiplies the basis ($1,000) by 40% to get the
depreciation for a full tax year of $400. The corporation then multiplies $400
by
4/12 to get the short tax year depreciation of $133.
taxmap/pubs/p946-026.htm#en_us_publink1000107607If you have a short tax year after the tax year in which you
began depreciating property, you must change the way you figure depreciation for
that property. If you were using the percentage tables, you can no longer use
them. You must figure depreciation for the short tax year and each later tax
year as explained next.
taxmap/pubs/p946-026.htm#en_us_publink1000107608You can use either of the following methods to figure the depreciation
for years after a short tax year.
- The simplified method.
- The allocation method.
You must use the method you choose consistently.
Under the simplified method, you figure the depreciation for
a later 12-month year in the recovery period by multiplying the adjusted basis
of your property at the beginning of the year by the applicable depreciation
rate.
taxmap/pubs/p946-026.htm#en_us_publink1000107610Assume the same facts as in
Example 1 under
Property Placed in Service in a Short Tax Year, earlier. The Tara Corporation claimed depreciation of $167
for its short tax year. The adjusted basis on January 1 of the next year is $833
($1,000 − $167). Tara's depreciation for that next year is 40% of $833, or
$333.
taxmap/pubs/p946-026.htm#en_us_publink1000107611If a later tax year in the recovery period is a short tax year,
you figure depreciation for that year by multiplying the adjusted basis of the
property at the beginning of the tax year by the applicable depreciation rate,
and then by a fraction. The fraction's numerator is the number of months
(including parts of a month) in the tax year. Its denominator is 12.
taxmap/pubs/p946-026.htm#en_us_publink1000107612If you dispose of property in a later tax year before the end
of the recovery period, determine the depreciation for the year of disposition
by multiplying the adjusted basis of the property at the beginning of the tax
year by the applicable depreciation rate and then multiplying the result by a
fraction. The fraction's numerator is the number of months (including parts of a
month) the property is treated as in service during the tax year (applying the
applicable convention). Its denominator is 12.
taxmap/pubs/p946-026.htm#en_us_publink1000107613Under the allocation method, you figure the depreciation for
each later tax year by allocating to that year the depreciation attributable to
the parts of the recovery years that fall within that year. Whether your tax
year is a 12-month or short tax year, you figure the depreciation by determining
which recovery years are included in that year. For each recovery year included,
multiply the depreciation attributable to that recovery year by a fraction. The
fraction's numerator is the number of months (including parts of a month) that
are included in both the tax year and the recovery year. Its denominator is 12.
The allowable depreciation for the tax year is the sum of the depreciation
figured for each recovery year.
taxmap/pubs/p946-026.htm#en_us_publink1000107614Assume the same facts as in
Example 1 under
Property Placed in Service in a Short Tax Year, earlier. The Tara Corporation's first tax year after the short
tax year is a full year of 12 months, beginning January 1 and ending December
31. The first recovery year for the 5-year property placed in service during the
short tax year extends from August 1 to July 31. Tara deducted 5 months of the
first recovery year on its short-year tax return. Seven months of the first
recovery year and 5 months of the second recovery year fall within the next tax
year. The depreciation for the next tax year is $333, which is the sum of the
following.
- $233—The depreciation for the first recovery year
($400 ×
7/12). - $100—The depreciation for the second recovery year.
This is figured by multiplying the adjusted basis of $600 ($1,000 − $400)
by 40%, then multiplying the $240 result by
5/12.
If you dispose of property before the end of the recovery period
in a later tax year, determine the depreciation for the year of disposition by
multiplying the depreciation figured for each recovery year or part of a
recovery year included in the tax year by a fraction. The numerator of the
fraction is the number of months (including parts of months) the property is
treated as in service in the tax year (applying the applicable convention). The
denominator is 12. If there is more than one recovery year in the tax year, you
add together the depreciation for each recovery year.
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