Publication 534 Contents

(Rev. Nov.95) Introduction............................................... 2 Cat. No. 15064O

Department 1. Accelerated Cost Recovery System of the (ACRS) ................................................ 2

Treasury ACRS Defined...................................... 2

Depreciating What Can and Cannot Be

Internal Depreciated Under ACRS ............ 2

Revenue How To Figure the Deduction ............. 3

Service Property Placed Dispositions.......................................... 6

2. Other Methods of Depreciation ......... 7

How To Figure the Deduction ............. 7 in Service Methods To Use .................................. 8

How To Change Methods ................... 8

Before 1987 Dispositions.......................................... 9

3. Listed Property ..................................... 10

Listed Property Defined....................... 10 ● ACRS Predominant Use Test......................... 10

Deductions After Recovery ● Other Methods of Depreciation Period............................................. 12

Leased Property................................... 12 ● Listed Property What Records Must Be Kept .............. 12

Appendix ................................................... 14

Index ........................................................... 21

Important Change for

1995 

Major changes to Publications 534 and 946.

This publication, as well as Publication 946,

How To Depreciate Property, has been

changed. Publication 534 has been shortened. It no longer contains general information on MACRS and the section 179 deduction. It contains a discussion of the

accelerated cost recovery system (ACRS), the

ACRS Percentage Tables, a discussion of

other methods of depreciation, and a limited

discussion of listed property.

We expanded Publication 946 by adding

material taken from Publication 534. We

added more detail to the discussions of the

section 179 deduction, the modified accelerated cost recovery system (MACRS), and

listed property. We replaced the partial

MACRS Percentage Tables with the complete

ones from Publication 534. We also added the

Table of Class Lives and Recovery Periods

from Publication 534.

We made these changes to eliminate most

of the duplication that existed in the two publications. This will save money and make it easier for you to decide which publication you

need. Use this publication to figure depreciation on property you placed in service before

1987; use Publication 946 to figure depreciation on property you placed in service after

1986.

Introduction

The law allows you to recover your cost in business or income-producing property through

yearly tax deductions. You do this by depreciating your property, that is, by deducting some
of your cost on your tax return each year. You during this period, you must continue to figure

can depreciate both tangible property, such as your depreciation under ACRS. How To Use This

a car, building, or machinery, and certain intan- If you used listed property placed in service

gible property, such as a copyright or a patent. Publication after June 18, 1984, less than 50% for busiThe amount you can deduct depends on: ness in 1995, see Predominant Use Test in This publication describes the kinds of prop- chapter 3. Listed property includes cars, other 1) How much the property cost, erty that can be depreciated and the methods means of transportation, and certain used to figure depreciation on property placed 2) When you began using it, computers. in service before 1987. It is divided into three 3) How long it will take to recover your cost, Any additions or improvements placed in chapters and contains an appendix. and service after 1986, including any components Chapter 1 explains the rules for depreciat- of a building (such as plumbing, wiring, storm 4) Which of several depreciation methods ing property under the Accelerated windows, etc.), are depreciated using MACRS, you use. Cost Recovery System (ACRS). discussed in chapter 3 of Publication 946. It

Chapter 2 explains the rules for depreciat- does not matter that the underlying property is Depreciation defined. Depreciation is a loss ing property first used before 1981. depreciated under ACRS or one of the other in the value of property over the time the prop- methods. erty is being used. Events that can cause Chapter 3 explains the rules for listed

property to depreciate include wear and tear, property. Also this chapter defines

age, deterioration, and obsolescence. You listed property.

can get back your cost of certain property, The appendix contains the ACRS Percent- ACRS Defined 

such as equipment you use in your business or age Tables. ACRS consists of accelerated depreciation property used for the production of income by methods and an alternate ACRS method that taking deductions for depreciation. could have been elected. The alternate ACRS

method used a recovery percentage based on Amortization. Amortization is similar to dea modified straight line method. The law preciation. Using amortization, you can re- prescribes fixed percentages to be uses for cover your cost or basis in certain property 1. each class of property. proportionately over a specific number of Property depreciable under ACRS is called years or months. Examples of costs you can recovery property. The recovery class of amortize are the costs of starting a business, Accelerated Cost property determines the recovery period. Gen- reforestation, and pollution control facilities. erally, the class life of property places it in a 3– You can find information on amortization in Recovery System year, 5–year, 10–year, 15–year, 18–year, or chapter 12 of Publication 535, Business

19–year recovery class. Expenses. (ACRS) Under ACRS, the prescribed percentages

are used to recover the unadjusted basis of re- Alternative minimum tax. If you use acceler- covery property. To figure a depreciation de- ated depreciation for real property, or personal Topics duction, you multiply the prescribed percent- property that is leased to others, you may be li- This chapter discusses: age for the recovery class by the unadjusted able for the alternative minimum tax. Acceler- ● The definition of ACRS basis of the recovery property. ated depreciation is any method, that allows You must continue to figure your deprecia- recovery at a faster rate in the earlier years ● What can and cannot be depreciated tion under ACRS for property placed in service than the straight line method. For more infor- under ACRS

mation, you may wish to see the following: after 1980 and before 1987. For property you ● How to figure the deduction placed in service after 1986, you must use ● Form 6251, Alternative Minimum Tax–Indi- ● Dispositions MACRS, discussed in chapter 3 of Publication viduals, and 946. ● Publication 542, Tax Information on Useful Items Corporations. You may want to see:

What Can and Cannot Ordering publications and forms. To order Publication

free publications and forms, call 1–800–TAX– □ Be Depreciated Under 544 Sales and Other Dispositions of FORM (1–800–829–3676). You can also write Assets to the IRS Forms Distribution Center nearest ACRS 

you. Check your income tax package for the □ 551 Basis of Assets ACRS applies to most depreciable tangible address. □ 583 Starting a Business and Keeping property placed in service after 1980 and If you have access to a personal computer Records before 1987. It includes new or used and real and a modem, you can also get many forms or personal property. The property must be for and publications electronically. See How To Form (and Instructions) use in a trade or business or for the production Get Forms and Publications in your income tax □ of income. Property you acquired before 1981 package for details. 3115 Application for Change in or after 1986 is not ACRS recovery property. Accounting Method For information on depreciating property ac- Telephone help. You can call the IRS with □ 4562 Depreciation and Amortization quired before 1981, see chapter 2. For infor- your tax question Monday through Friday dur- mation on depreciating property acquired after ing regular business hours. Check your tele- 1986, see chapter 3 of Publication 946. phone book for the local number or you can The Accelerated Cost Recovery System

call 1–800–829–1040. (ACRS) applies to property first used before

1987. It is the name given to tax rules for get- Recovery Property 

Telephone help for hearing-impaired per- ting back (recovering) through depreciation Recovery property under ACRS is tangible desons. If you have access to TDD equipment, deductions the cost of property used in a trade preciable property placed in service after 1980

you can call 1–800–829–4059 with your tax or business or to produce income. These rules and before 1987. It generally includes new or

question or to order forms and publications. are mandatory and generally apply to tangible used property that you acquired after 1980

See your tax package for the hours of property placed in service after 1980 and and before 1987 for use in your trade or busioperation. before 1987. If you placed property in service ness or for the production of income.

Page 2 Chapter 1 ACCELERATED COST RECOVERY SYSTEM (ACRS)
Nonrecovery Property Unadjusted Basis 10–Year Property 

10–year property includes certain real prop- You cannot use ACRS for property you placed To figure your ACRS deduction, you multiply erty such as theme-park structures and certain in service before 1981 or after 1986. the unadjusted basis in your recovery property public utility property. Manufactured homes Nonrecovery property also includes: by its applicable percentage for the year. Un- (including mobile homes) and railroad tank adjusted basis is the same amount you would 1) Intangible property, cars are also 10–year property. use to figure gain on a sale, but it is figured You do not treat a building, and its struc- 2) Property you elected to exclude from without taking into account any depreciation tural components, as 10–year property by rea- ACRS that is properly depreciated under taken in earlier years. However, reduce your son of a change in use after you placed the a method of depreciation that is not original basis by the amount of amortization property in service. For example, a building based on a term of years, taken on the property and by any section 179 (15–year real property) that was placed in ser- deduction claimed as discussed in chapter 2 3) Certain public utility property, and vice in 1981 and was converted to a theme- of Publication 946.

park structure in 1986 remains 15–year real 4) Certain property acquired and excluded If you buy property, your unadjusted basis property. is usually its cost minus any amortized amount from ACRS because of the antichurning The ACRS percentages for 10–year recov- rules. and minus any section 179 deduction elected. ery property are: If you acquire property in some other way,

such as by inheriting it, getting it as a gift, or Intangible property. Intangible property is Recovery Period Percentage building it yourself, you figure your unadjusted not depreciated under ACRS. 1st year ............................ 8% basis under other rules. See Publication 551.

2nd year ........................... 14%

Property depreciated under methods not 3rd year ............................ 12%

expressed in a term of years. Certain prop- Classes of Recovery 4th through 6th year ............... 10%

erty depreciated under a method not ex- Property 7th through 10th year .............. 9%

pressed in a term of years is not depreciated All recovery property under ACRS is in one of under ACRS. This included any property: If you used the percentages above, you

the following classes. The class for your prop- cannot claim depreciation for this property af- 1) If you made an irrevocable election to ex- erty was determined when you began to de- ter 1995.

clude such property, and preciate it. Example. On April 21, 1986, you bought

2) In the first year that you could have and placed in service a new mobile home for

claimed depreciation, you properly used 3–Year Property $26,000 to be used as rental property. You

the unit-of-production method or any 3–year property includes automobiles, light- paid $10,000 cash and signed a note for

method of depreciation not expressed in duty trucks (actual unloaded weight less than $16,000 giving you an unadjusted basis of

a term of years (not including the retire- 13,000 pounds), and tractor units for use over- $26,000. On June 8, 1986, you bought and

ment-replacement-betterment method). the-road. Race horses over 2 years old when placed in service a used mobile home for use

placed in service are 3–year property. Any as rental property at a total cost of $11,500.

Public utility property. other horses over 12 years old when you The total unadjusted basis of your 10–year re- Public utility property

for which the taxpayer does not use a normali- placed them in service are also included in the covery property placed in service in 1986 was

zation method of accounting is excluded from 3–year property class. $37,500 ($26,000 + $11,500). Your ACRS deACRS and is subject to depreciation under a The ACRS percentages for 3–year recov- duction was $3,000 (8% × $37,500). In 1987,

special rule. ery property are: your ACRS deduction was $5,250 (14%

× $37,500). In 1988, your ACRS deduction

Recovery Period Percentage was $4,500 (12% × $37,500). In 1989, 1990, Additions or improvements to ACRS prop- and 1991, your ACRS deduction was $3,750 erty after 1986. Any additions or improve- 1st year ............................ 25%

(10% × $37,500). In 1992, 1993, 1994, and ments placed in service after 1986, including 2nd year ........................... 38%

1995 your deduction for each year is $3,375 any components of a building (plumbing, wir- 3rd year ............................ 37%

(9% × $37,500). ing, storm windows, etc.) are depreciated us- If you used the percentages above to de- ing MACRS, discussed in chapter 3 of Publica- preciate your 3–year recovery property, your 15–Year Real Property tion 946. It does not matter that the underlying property, except for certain passenger auto- property is depreciated under ACRS or one of 15–year real property is real property that is rethe other methods. mobiles, is fully depreciated. You cannot claim covery property placed in service before depreciation for this property after 1988. March 16, 1984. It includes all real property,

such as buildings, other than that designated

5–Year Property as 5–year or 10–year property. How To Figure the Unlike the 3–, 5–, or 10–year classes of 5–year property includes computers, copiers, property, the percentages for 15–year real Deduction and equipment, such as office furniture and property depend on when you placed the fixtures. It also includes single purpose agriAfter you determine that your property can be property in service during your tax year. You cultural or horticultural structures and petrodepreciated under ACRS, you are ready to fig- could group 15–year real property by month leum storage facilities (other than buildings

ure your deduction. Because the conventions and year placed in service. and their structural components).

are built into the percentage table rates, you In Table 1, at the end of this publication in The ACRS percentages for 5–year recovonly need to know the following: the Appendix, find the month in your tax year ery property are: that you placed the property in service in your 1) The unadjusted basis of your recovery Recovery period Percentage trade or business or for the production of in- property, come. You use the percentages listed under 1st year ............................ 15% that month for each year of the recovery pe- 2) The classes of recovery property, 2nd year ........................... 22% riod to determine your depreciation deduction 3) The recovery periods, and 3rd through 5th year ............... 21% each year.

4) Whether to use the prescribed percent- If you used the percentages above to de- Example. On March 5, 1984, you placed

ages based on accelerated methods or preciate your 5–year recovery property, it is an apartment building in service in your busipercentages based on using the alternate fully depreciated. You cannot claim deprecia- ness. It is 15–year real property. After subACRS method. tion for this property after 1990. tracting the value of the land, your unadjusted

Chapter 1 ACCELERATED COST RECOVERY SYSTEM (ACRS) Page 3
basis in the building is $250,000. You use the Your deduction for 1986 through 2001 is Year Rate Deduction

calendar year as your tax year. March is the shown in the following table. 1985 7.0% $6,650

third month of your tax year. Your ACRS de- 1986 9.0% 8,550 Year Rate Deduction duction for 1984 was $25,000 (10% × 1987 8.0% 7,600

1986 8.9% $5,251 $250,000). For 1985, the percentage for the 1988 7.0% 6,650

1987 12.1% 7,139 third month of the second year of the recovery 1989 7.0% 6,650

1988 10.5% 6,195 period is 11%. Your deduction was $27,500 1990 6.0% 5,700

1989 9.1% 5,369 (11% × $250,000). For the third, fourth, and 1991 5.0% 4,750

1990 7.9% 4,661 fifth years of the recovery period (1986, 1987, 1992 5.0% 4,750

1991 6.9% 4,071 and 1988), the percentages are 9%, 8%, and 1993 5.0% 4,750

1992 5.9% 3,481 7%. For 1989 through 1992, the percentage 1994 5.0% 4,750

1993 5.2% 3,068 1995 5.0% 4,750 for the third month is 6%. Your deduction each 1994 4.6% 2,714 1996 5.0% 4,750 year is $15,000 (6% × $250,000). For 1993, 1995 4.6% 2,714 1997 5.0% 4,750 1994, and 1995, the percentage for the third 1996 4.6% 2,714 1998 4.0% 3,800 month is 5%. Your depreciation deduction is 1997 4.6% 2,714 1999 4.0% 3,800 $12,500 (5% × $250,000) for 1993, 1994, 1998 4.6% 2,714 2000 4.0% 3,800 and 1995. 1999 4.5% 2,655 2001 4.0% 3,800

2000 4.5% 2,655 2002 4.0% 3,800

2001 1.5% 885 Low-Income Housing 2003 1.0% 950

Low-income housing that was assigned a 15–

year recovery period under ACRS includes the 18–Year Real Property 19–Year Real Property following types of property: 18–year real property is real property that is re- 19–year real property is real property that is re- covery property placed in service after March covery property placed in service after May 8, 1) Federally assisted housing projects 15, 1984, and before May 9, 1985. It includes 1985, and before 1987. It includes all real where the mortgage is insured under sec- real property, such as buildings, other than property, other than that designated as 5– tion 221(d)(3) or 236 of the National that designated as 5–year, 10–year, 15–year year, 10–year, 15–year, or 18–year real prop- Housing Act, or housing financed or as- real property, or low-income housing. erty, or low-income housing. sisted by direct loan or tax abatement The ACRS percentages for 18–year real The ACRS percentages for 19–year real under similar provisions of state or local property depend on when you placed the property depend on when you placed the laws. property in service in your trade or business or property in service in a trade or business or for for the production of income during your tax the production of income during your tax year. 2) Low-income rental housing for which a year. There are also tables for 18–year real Table 6 shows the percentages for 19–year depreciation deduction for rehabilitation property in the Appendix. Table 4 shows the real property. expenditures is allowed. percentages for 18–year real property you You find the month in your tax year that you placed in service after June 22, 1984, and 3) Low-income rental housing held for occu- placed the property in service. You use the before May 9, 1985. Table 5 is for 18–year real pancy by families or individuals eligible to percentages listed under that month for each property placed in service after March 15, year of the recovery period. receive subsidies under section 8 of the 1984, and before June 23, 1984.

United States Housing Act of 1937, as Find the month in your tax year that you

amended, or under the provisions of state placed the property in service in a trade or Recovery Periods or local laws that authorize similar subsi- business or for the production of income. Use Each item of recovery property is assigned to dies for low-income families. the percentages listed under that month for a class of property. The classes of recovery each year of the recovery period. property establish the recovery periods over 4) Housing financed or assisted by direct Example. On April 28, 1985, you bought which the unadjusted basis of items in a class loan or insured under Title V of the Hous- and placed in service a rental house. The is recovered. The classes of property are: ing Act of 1949. house, not including the land, cost $95,000. 3–Year property This is your unadjusted basis for the house.

The ACRS percentages for low-income You use the calendar year as your tax year. 5–Year property

housing real property, like the regular 15–year Because the house was placed in service after 10–Year property real property percentages, depend on when June 22, 1984, and before May 9, 1985, it is 15–Year real property you placed the property in service. Find the 18–year real property. You use Table 4 to figmonth in your tax year in Table 2 or 3 at the ure your deduction for the house. April is the Low-income housing

end of this publication in the Appendix that you fourth month of your tax year. Your deduction 18–Year real property for 1985 through 2003 is shown in the follow- first placed the property in service as rental

ing table. 19–Year real property housing. Use the percentages listed under

that month for each year of the recovery period. Table 2 shows percentages for low-income housing placed in service before May 9, Alternate ACRS Method

1985. Table 3 shows percentages for low-in- (Modified Straight Line come housing placed in service after May 8, Method) 1985, and before 1987.

ACRS provides an alternate ACRS method Example. In May 1986, you acquired and that could be elected. This alternate ACRS

placed in service a house that qualified as low- method uses a recovery percentage based on income rental housing under item 3) of the a modified straight line method.

above listing. You use the calendar year as This alternate ACRS method generally

your tax year. You use Table C–3 because the uses percentages other than those from the

property was placed in service after May 8, tables. If you elected the alternate ACRS

1985. Your unadjusted basis for the property, method, you determine the recovery period by

not including the land, was $59,000. using the following schedule. This schedule is

Page 4 Chapter 1 ACCELERATED COST RECOVERY SYSTEM (ACRS)
for other than 18– and 19–year real property You take a full year of depreciation for both the alternate method are in Tables 7, 8, 10, 11,

and low-income housing: the truck and the saw for the years 1987 14, and 15 in the Appendix. There are two tathrough 1990. Your ACRS deduction for each bles for each alternate recovery period. One In the case You could have elected of those years is as follows: table shows the percentage for property of: a recovery period of: placed in service after June 22, 1984. The

3–year property Light-duty truck ........... 3, 5, or 12 years other table has the percentages for property

5–year property ........... 5, 12, or 25 years 5 years straight line = 20% placed in service after March 15, 1984, and

10–year property ......... 10, 25, or 35 years 20% × $13,000 = $ 2,600 before June 23, 1984.

15–year real property ..... 15, 35, or 45 years Electric saw Alternate periods for 19–year real prop- 12 years straight line = 8.333% erty. For 19–year real property, the alternate Percentages. The straight-line percentages 8.333% × $500 = $ 41.67 recovery periods are 19, 35, or 45 years. If you for the alternate ACRS method are: Total annual ACRS deduction for selected a 19–year recovery period, use Table

Recovery Period Percentage 1987 through 1990 $2,641.67 9 to determine your deduction. If you select a

35– or 45–year recovery period, use either Ta- 5 years ............................. 20.00% In 1991, you take a half-year of deprecia- ble 13 or 14. 10 years ............................. 10.00% tion for the truck and a full year of depreciation 12 years ............................. 8.333% Example. You placed in service an apart- for the saw. Your ACRS deduction for 1991 is 15 years ............................. 6.667% ment building on August 3, 1986. The building as follows: 25 years ............................. 4.00% is 19–year real property. The sales contract al35 years ............................. 2.857% located $300,000 to the building and $100,000 Light-duty truck 

to the land. You use the calendar year as your 5 years straight line = 20% You apply the percentage to the unad- tax year. You chose the alternate ACRS 20% × $13,000 = $2,600 justed basis (defined earlier) of the property to method over a recovery period of 35 years. Half-year convention –1

/2 of $2,600= $1,300.00 figure your ACRS deduction. There are tables For 1986, you figure your ACRS deduction us- for 18– and 19–year real property later in this Electric saw ing Table 13. August is the eighth month of publication in the Appendix. For 15–year real your tax year. The percentage from Table 13 12 years straight line = 8.333% property, see 15–year real property, later. for the eighth month is 1.1%. Your deduction 8.333% × $500 = $ 41.67 was $3,300 ($300,000 × 1.1%). The deduc- Total ACRS deduction for 1991 $1,341.67 3–, 5–, and 10–year property. If you elected tion rate from ACRS Table 13 for years 2 to use an alternate recovery percentage, you through 20 is 2.9% so that your deduction in have to use the same recovery percentage for The truck is fully depreciated after 1991. 1987 through 2005 is $8,700 ($300,000 × all property in that class that you placed in ser- You take a full year of depreciation for the saw 2.9%). vice in that tax year. This applies throughout for the years 1992 through 1997. Your ACRS

the recovery period you selected. deduction for each of those years is as Alternate periods for low-income housing. Half-year convention. follows: If you elected the For low-income housing, the alternate recov- alternate method, only a half-year of deprecia- Electric saw ery periods are 15, 35, or 45 years. If you se- tion was deducted for the year you placed the lected a 15–year period for this property, use property in service. This applied regardless of 12 years straight line = 8.333%

6.667% as the percentage. If you selected a when in the tax year you placed the property in 8.333% × $500 = $ 41.67 35– or 45–year period, use either Table 11, 12, service. For each of the remaining years in the Total annual ACRS deduction for or 15. recovery period, you take a full year’s deduc- 1992 through 1997 $ 41.67

tion. If you hold the property for the entire re- Election. You had to make the election to use covery period, a half-year of depreciation is al- You take a half-year of depreciation for the the alternate ACRS method by the return due lowable for the year following the end of the saw for 1998. Your ACRS deduction for 1998 date (including extensions) for the tax year you recovery period. is as follows: placed the property in service. Example. You operate a small upholstery Electric saw business. On March 19, 1986, you bought and Revocation of election. Your election to use placed in service a $13,000 light-duty panel 12 years straight line = 8.333%

an alternate ACRS method, once made, can 8.333% × $500 = $ 41.67 truck to be used in your business and a $500 be changed only with the consent of the Com- electric saw. You elected to use the alternate Half-year convention –1

/2 of $41.67= 20.84 missioner. The Commissioner grants consent ACRS method. You did not elect to take a sec- Total ACRS deduction for 1998 $ 20.84 only in extraordinary circumstances. Any re- tion 179 deduction. You decided to recover quest for a revocation will be considered a re- the cost of the truck, which is 3–year recovery The saw is fully depreciated after 1998. quest for a ruling. property, over 5 years. The saw is 5–year

property, but you decided to recover its cost 15–year real property. Under ACRS, you over 12 years. ACRS Deduction in Short could also elect to use the alternate ACRS For 1986, your ACRS deduction reflected method for 15–year real property. The alter- Tax Year the half-year convention. In the first year, you nate ACRS method allows you to depreciate For a tax year that is less than 12 months, the deducted half of the amount determined for a your 15–year real property using the straight ACRS deduction is prorated on a 12–month full year. Your ACRS deduction for 1986 is as line ACRS method over the alternate recovery basis. Figure the amount of the ACRS deduc- follows: periods of 15, 35, or 45 years. If you selected a tion for a short tax year as follows:

15–year recovery period, you use the percent- Light-duty truck 1) First, you figure the ACRS deduction for a age (6.667%) from the schedule above. You 5 years straight line = 20% full year. You figure this by multiplying the prorate this percentage for the number of 20% × $13,000 = $2,600 unadjusted basis by the recovery months the property was in service in the first Half-year convention –1

/2 of $2,600= $1,300.00 percentage. year. If you selected a 35– or 45–year recovery

Electric saw period, you use either Table 11 or 15. 2) You then multiply the ACRS deduction

determined for a full tax year by a fraction. 12 years straight line = 8.333%

Alternate periods for 18–year real prop- 8.333% × $500 = $41.67

erty. For 18–year real property, the alternate The numerator (top number) of the fraction is Half-year convention –1

/2 of $41.67= 20.84

recovery periods are 18, 35, or 45 years. The the number of months in the short tax year and Total ACRS deduction for 1986 $1,320.84 percentages for 18–year real property under the denominator (bottom number) is 12. For

Chapter 1 ACCELERATED COST RECOVERY SYSTEM (ACRS) Page 5
example, a corporation placed in service in Under the special rule, if you elected to use that you held the property. Under the midJune 1986 an item of 3–year property with an a mass asset account, you recognize gain to month convention, you count September as

unadjusted basis of $10,000. The corporation half a month. Your ACRS deduction for 1995 is the extent of the proceeds from the disposition

files a tax return, because of a change in its ac- $3,542 ($5,000 of the asset. You leave the unadjusted basis of × 8.5/12).

counting period, for the 6–month short tax the property in the account until recovered in

year ending June 30, 1986. The full year’s future years. If you did this, include the total Depreciation Recapture ACRS deduction for this item is $2,500 proceeds realized from the disposition in in- If you dispose of property depreciated under ($10,000 × 25%), the first year percentage come on the tax return for the year of ACRS that is section 1245 recovery property, from the 3–year table. The ACRS deduction disposition. you will generally recognize gain or loss. Gain for the short tax year is $1,250 ($2,500 × 6/ Early dispositions — 15–year real prop- recognized on a disposition is ordinary income 12). erty. If you dispose of 15–year real property, to the extent of prior depreciation deductions You use the full ACRS percentages during you base your ACRS deduction for the year of taken. This recapture rule applies to all per- the remaining years of the recovery period. disposition on the number of months in use. sonal property in the 3–year, 5–year, and 10– For the first tax year after the recovery period, You use a full-month convention. For a dis- year classes. You recapture gain on manufac- the unrecovered basis will be deductible. position at any time during a particular month tured homes and theme park structures in the before the end of the recovery period, no de- 10–year class as section 1245 property. Sec- Exception. For the tax year in which you duction is allowed for the month of disposition. tion 1245 property generally includes all per- placed 15–, 18–, or 19–year real property in This applies whether you use the regular sonal property. See Section 1245 property in service or in the tax year you dispose of it, you ACRS method or elected the alternate ACRS chapter 4 of Publication 544 for more compute the ACRS deduction for the number method. information. of months that the property is in service during Example. You purchased and placed in You treat dispositions of section 1250 real that tax year. You compute the number of service a rental house on March 2, 1984, for property on which you have a gain as section months using either a full month or mid-month $98,000 (not including the cost of land). You 1245 recovery property. You recognize gain convention. This is true regardless of the num- file your return based on a calendar year. Your on this property as ordinary income to the ex- ber of months in the tax year and the recovery rate from Table 1 for the third month is 10%. tent of prior depreciation deductions taken. period and method used. Your ACRS deduction for 1984 was $9,800 Section 1250 property includes most real

property. See Section 1250 property in chap- ($98.000 × 10%). For 1985 through 1988,

you figured your ACRS deductions using 11%, ter 4 of Publication 544 for more information.

Dispositions 9%, 8%, and 7% × $98,000. For 1989 This rule applies to all section 1250 real property except the following property: through 1992, you figured your ACRS deduc- A disposition is the permanent withdrawal of tions using 6% for each year. The deduction 1) Any 15–, 18–, or 19–year real property property from use in your trade or business or each year was $98,000 × 6%. For 1993 and that is residential rental property. in the production of income. You can make a 1994, the ACRS deduction is ($98,000 × 5%) withdrawal by sale, exchange, retirement, 2) Any 15–, 18–, or 19–year real property $4,900 for each year. You sell the house on abandonment, or destruction. that you elected to depreciate using the June 1, 1995. You generally recognize gain or loss on the alternate ACRS method.

You figure your ACRS deduction for 1995 disposition of an asset by sale. However, non- 3) Any 15–, 18–, or 19–year real property for the full year and then prorate that amount recognition rules can allow you to postpone that is subsidized low-income housing. for the months of use. The full ACRS deduc- some gain. See Publication 544. tion for 1995 is $4,900 ($98,000 × 5%). You If you physically abandon property, you For these recapture rules, you treat the sec- then prorate this amount to the 5 months in can deduct as a loss the adjusted basis of the tion 179 deduction and 50% of the investment 1995 during which it was rented. Your ACRS asset at the time of its abandonment. Your in- credit that reduced your basis as depreciation. deduction for 1995 is $2,042 ($4,900 × 5/12). tent must be to discard the asset so that you See Publication 544 for further discussion Early dispositions — 18– and 19–year will not use it again or retrieve it for sale, ex- of dispositions of section 1245 and 1250 real property. If you dispose of 18– or 19– change, or other disposition. property. year real property, you base your ACRS deduction for the year of disposition on the num- Early dispositions. The disposal of an asset ber of months in use. For 18–year property before the end of its specified recovery period, placed in service before June 23, 1984, use a is referred to as an early disposition. When an full-month convention on a disposition. For early disposition occurs, the depreciation de- 18–year property placed in service after June 2. duction in the year of disposition depends on 22, 1984, and for 19–year property, determine the class of property involved. the number of months in use by using the mid- Early dispositions of ACRS property Other Methods of month convention. Under the mid-month other than 15–, 18–, or 19–year real prop- convention, treat real property disposed of erty. Generally, you get no ACRS deduction any time during a month as disposed of in the Depreciation for the tax year in which you dispose of or re- middle of that month. Count the month of dis- tire recovery property, except for 15–, 18–, and position as half a month of use. 19–year real property. This means there is no Topics depreciation deduction under ACRS in the Example. You purchased and placed in This chapter discusses: year you dispose of or retire any of your 3–, 5–, service a rental house on July 2, 1984, for ● How to figure the deduction or 10–year recovery property. $100,000 (not including the cost of land). You

Dispositions — mass asset accounts. file your return based on a calendar year. Your ● Methods to use

The law provides a special rule to avoid the rate from Table 4 for the seventh month is 4%. ● How to change methods calculation of gain on the disposition of assets You figured your ACRS deduction for 1984 ● Dispositions from mass asset accounts. A mass asset ac- was $4,000 ($100,000 × 4%). In 1985

count includes items usually minor in value in through 1994, your ACRS deductions were

9%, 8%, 8%, 7%, 6%, 6%, 5%, 5%, and 5% Useful Items relation to the group, numerous in quantity, im- You may want to see: practical to separately identify, and not usually × $100,000. You sell the house on Septemaccounted for on a separate basis, but on a to- ber 24, 1995. Figure your ACRS deduction for Publication tal dollar value. Examples of mass assets in- 1995 for the months of use. The full ACRS declude minor items of office, plant, and store duction for 1995 is $5,000 ($100,000 × 5%). □ 544 Sales and Other Dispositions of

furniture and fixtures. Prorate this amount for the 8.5 months in 1995 Assets

Page 6 Chapter 2 OTHER METHODS OF DEPRECIATION
□ 551 Basis of Assets purchase as a business expense the cost of 3) Your repair policy, and

□ any cassette that has a useful life of one year 583 Starting a Business and Keeping 4) Environmental conditions. or less. Records

□ 946 How To Depreciate Property The useful life can also be affected by

technological improvements, progress in the

Form (and Instructions) How To Figure the arts, reasonably foreseeable economic

changes, shifting of business centers, prohibi- □ 3115 Application for Change in Deduction tory laws, and other causes. Consider all these Accounting Method factors before you arrive at a useful life for Two other reasonable methods can be used to □ 4562 Depreciation and Amortization your property. figure your deduction for property not covered

□ Schedule C (Form 1040) Profit or The useful life of the same type of property under ACRS or MACRS. These methods are

Loss From Business varies from user to user. When you determine straight line and declining balance. the useful life of your property, keep in mind To figure depreciation using these meth- your own experience with similar property. You ods, you must generally determine three

If your property is being depreciated under can use the general experience of the industry things about the property you intend to depreACRS, you must continue to use rules for de- you are in until you are able to determine a ciate. They are:

preciation that applied when you placed the useful life of your property from your own 1) The basis, property in service. If your property qualified experience.

for MACRS, you must depreciate it under 2) The useful life, and

MACRS. See Publication 946. Change in useful life. You base your esti- 3) The estimated salvage value at the end of However, you cannot use MACRS for cer- mate of useful life on certain facts. If these its useful life. tain property because of special rules that ex- facts change significantly, you can adjust your

clude it from MACRS. Also, you can elect to estimate of the remaining useful life. However, The amount of the deduction in any year also exclude certain property from being depreci- you redetermine the estimated useful life only depends on which method of depreciation you ated under MACRS. Property that you cannot when the change is substantial and there is a choose. depreciate using MACRS includes: clear reason for making the change.

1) Intangible property, Basis 

2) Property you can elect to exclude from Salvage Value To deduct the proper amount of depreciation MACRS that you properly depreciate It is important for you to accurately determine each year, first determine your basis in the under a method that is not based on a the correct salvage value of the property you property you intend to depreciate. The basis term of years, used for figuring depreciation is the same as want to depreciate. You generally cannot de3) Certain public utility property, the basis that would be used for figuring the preciate property below a reasonable salvage

gain on a sale. Your original basis is usually value. 4) Any motion picture film or video tape, the purchase price. However, if you acquire 5) Any sound recording, and property in some other way, such as inheriting Determining salvage value. Salvage value is

6) Certain real and personal property placed it, getting it as a gift, or building it yourself, you the estimated value of property at the end of

have to figure your original basis in a different its useful life. It is what you expect to get for in service before 1987.

way. the property if you sell it after you can no

Intangible property. You cannot depreciate longer use it productively. You must estimate

intangible property under ACRS or MACRS. Adjusted basis. Events will often change the the salvage value of a piece of property when

You depreciate intangible property using any basis of property. When this occurs, the you first acquire it.

other reasonable method, usually, the straight changed basis is called the adjusted basis. Salvage value is affected both by how you

line method. Some events, such as improvements you use the property and how long you use it. If it is

make, increase basis. Events such as deduct- your policy to dispose of property that is still in

Note. The cost of certain intangible prop- ing casualty losses and depreciation decrease good operating condition, the salvage value

erty that you acquire after August 10, 1993, basis. If basis is adjusted, the depreciation de- can be relatively large. However, if your policy

must be amortized over a 15–year period. For duction may also have to be changed, de- is to use property until it is no longer usable, its

more information, see chapter 12 of Publica- pending on the reason for the adjustment and salvage value can be its junk value.

the method of depreciation you are using. tion 535.

Publication 551 explains how to figure ba- Changing salvage value. Once you detersis for property acquired in different ways. It mine the salvage value for property, you Public utility property. The law excludes also discusses what items increase and de- should not change it merely because prices from MACRS any public utility property for crease basis, how to figure adjusted basis, and have changed. However, if you redetermine which the taxpayer does not use a normaliza- how to allocate cost if you buy several pieces the useful life of property, as discussed earlier tion method of accounting. This type of prop- of property at one time. under Change in useful life, you can also rede- erty is subject to depreciation under a special termine the salvage value. When you redeter- rule. Useful Life mine the salvage value, take into account the

facts that exist at the time. Videocassettes. If you are in the videocas- The useful life of a piece of property is an estisette rental business, you can depreciate mate of how long you can expect to use it in Net salvage. Net salvage is the salvage value those videocassettes purchased for rental. your trade or business, or to produce income. of property minus what it costs to remove it You can depreciate the cost less salvage It is the length of time over which you will make when you dispose of it. You can choose either value of those videocassettes that have a use- yearly depreciation deductions of your basis in salvage value or net salvage when you figure ful life over one year using either: the property. It is how long it will continue to be depreciation. You must consistently use the useful to you, not how long the property will ● The straight line method, or one you choose and the treatment of the costs last. ● The income forecast method. of Many things affect the useful life of prop- removal must be consistent with the practice adopted. However, if the cost to remove erty, such as: The straight line method, salvage value, and the property is more than the estimated sal- 1) Frequency of use, useful life are discussed later under Methods vage value, then net salvage is zero. Your salTo Use. You can deduct in the year of 2) Age when acquired, vage value can never be less than zero.

Chapter 2 OTHER METHODS OF DEPRECIATION Page 7
Ten percent rule. If you acquire personal 1) Divide the number 1 by the useful life of

property that has a useful life of 3 years or your property to get a straight line rate. How To Change more, you can use an amount for salvage (For example, if property has a useful life

value that is less than your actual estimate. of 5 years, its normal straight line rate of Methods 

You can subtract from your estimate of sal- depreciation is 1

/5, or 20%.) In some cases, you may change your method vage value an amount equal to 10% of your of depreciation for property depreciated under 2) Multiply this straight line rate by a number basis in the property. If salvage value is less a reasonable method. If you change your that is more than 1 but not more than 2 to than 10% of basis, you can ignore salvage method of depreciation, it is generally a determine the declining balance rate. value when you figure depreciation. change in your method of accounting. You

must get IRS consent before making the Unless there is a change in the useful life dur- change. However, you do not need permission ing the time you depreciate the property, the Methods To Use for certain changes in your method of depreci- rate of depreciation generally will not change. ation. The rules discussed in this section do

Two methods of depreciation are the straight not apply to property depreciated under ACRS

Depreciation deductions. After you deter- or MACRS. line and declining balance methods. If ACRS

or MACRS does not apply, you can use one of mine the rate of depreciation, multiply the ad- For information on ACRS elections, see

justed basis of the property by it. This gives Revocation of election, in chapter 1 under Al- these methods. The straight line and declining

balance methods discussed in this section are you the amount of your deduction. For exam- ternate ACRS Method.

not figured in the same way as straight line or ple, if your adjusted basis at the beginning of

declining balance methods under MACRS. the first year is $10,000, and your declining Change to the straight line method. You

balance rate is 20%, your depreciation deduc- can change from the declining balance

method to the straight line method at any time Straight Line Method tion for the first year is $2,000 ($10,000 × during the useful life of your property without 20%). To figure your depreciation deduction in Before 1981, you could use any reasonable IRS consent. However, if you have a written the second year, you must first adjust the ba- method for every kind of depreciable property. agreement with the IRS that prohibits a sis for the amount of depreciation you de- One of these methods was the straight line change, you must first get IRS permission. ducted in the first year. Subtract the previous method. This method was also used for intan- When the change is made, figure depreciation year’s depreciation from your basis ($10,000 gible property. It lets you deduct the same based on your adjusted basis in the property at – $2,000 = $8,000). Multiply this amount by amount of depreciation each year. that time. Your adjusted basis takes into ac- the rate of depreciation ($8,000 × 20% = To figure your deduction, determine the ad- count all previous depreciation deductions.

justed basis of your property, its salvage value, $1,600). Your depreciation deduction for the Use the estimated remaining useful life of your second year is $1,600. and its estimated useful life. Subtract the sal- property at the time of change and its estivage value, if any, from the adjusted basis. As you can see from this example, your ad- mated salvage value.

The balance is the total amount of deprecia- justed basis in the property gets smaller each You can change from the declining balyear. Also, under this method, deductions are ance method to straight line only on the origi- tion you can take over the useful life of the

property. larger in the earlier years and smaller in the nal tax return for the year you first use the

Divide the balance by the number of years later years. You can make a change to the straight line method. You cannot make the

straight line method without consent. change on an amended return filed after the remaining in the useful life. This gives you the due date of the original return (including amount of your yearly depreciation deduction. extensions). Unless there is a big change in adjusted basis, Salvage value. Do not subtract salvage value When you make the change, attach a or useful life, this amount will stay the same when you figure your yearly depreciation de- statement to your tax return showing: throughout the time you depreciate the prop- ductions under the declining balance method.

erty. If, in the first year, you use the property 1) However, you cannot depreciate the property When you acquired the property,

for less than a full year, you must prorate your below its reasonable salvage value. Deter- 2) Its original cost or other original basis, depreciation deduction for the number of mine salvage value using the rules discussed

months in use. 3) The total amount claimed for depreciation earlier, including the special 10% rule. and other allowances since you acquired Example. In April 1994, Frank bought a Example. If your adjusted basis has been it, franchise for $5,600. It expires in 10 years. decreased to $1,000 and the rate of deprecia- 4) Its salvage value and remaining useful This property is intangible property that cannot tion is 20%, your depreciation deduction life, and be depreciated under MACRS. Frank depreci- should be $200. But if your estimate of salvage ates the franchise under the straight line 5) A description of the property and its use. value was $900, you can only deduct $100. method, using a 10–year useful life and no sal- This is because $100 is the amount that would vage value. He takes the $5,600 basis and di- After you change to straight line, you can- lower your adjusted basis to equal salvage vides that amount by 10 years ($5,600 ÷ 10 not change back to the declining balance value. = $560, a full year’s use). He must prorate the method or to any other method for a period of

$560 for his 9 months of use in 1994. This 10 years without written permission from the

gives him a deduction of $420 ($560 × 9/12). Income Forecast Method IRS.

In 1995, Frank can deduct $560 for the full The income forecast method requires income year. Changes that require permission. For most projections for each videocassette or group of other changes in method of depreciation, you videocassettes. You can group the videocas- must get permission from the IRS. To request Declining Balance Method settes by title for making this projection. You a change in method of depreciation, file Form The declining balance method allows you to determine the depreciation by applying a frac- 3115. File the application within the first 180 recover a larger amount of the cost of the tion to the cost less salvage value of the cas- days of the tax year the change is to become property in the early years of your use of the sette. The numerator is the income from the effective. In most cases, there is a user fee

property. The rate cannot be more than twice videocassette for the tax year and the denomi- that must accompany Form 3115. See the inthe straight line rate. nator is the total projected income for the cas- structions for Form 3115 to determine if a fee

sette. For more information on the income is required.

Rate of depreciation. Under this method, forecast method, see Revenue Ruling 60–358

you must determine your declining balance in Cumulative Bulletin 1960, Volume 2, on Changes granted automatically. The IRS

rate of depreciation. The initial step is to: page 68. automatically approves certain changes of a

Page 8 Chapter 2 OTHER METHODS OF DEPRECIATION
method of depreciation. But, you must file property is damaged by a fire or suddenly be- is its adjusted basis at the time of retirement,

Form 3115 for these automatic changes. comes obsolete and is now useless. as determined in the following discussions.

However, IRS can deny permission if Form Single item accounts. If an item of prop3115 is not filed on time. For more information Gain or loss on retirement. There are spe- erty is accounted for in a single item account,

on automatic changes, see Revenue Proce- cial rules for figuring the gain or loss on retire- the adjusted basis is the basis you would use

dure 74-11, 1974-1 C.B. 420. ment of property. The gain or loss will depend to figure gain or loss for a sale or exchange of

on several factors. These include the type of the property. This is generally the cost or other

Changes for which approval is not auto- withdrawal, if the withdrawal was from a single basis of the item of property less depreciation.

matic. The automatic change procedures do property or multiple property account, and if See Publication 551.

not apply to: the retirement was normal or abnormal. A sin- Multiple property account. For a normal

gle property account contains only one item of retirement from a multiple property account, if 1) Property or an account where you made a property. A multiple property account is one in you figured depreciation using the average ex- change in depreciation within the last 10 which several items have been combined with pected useful life, the adjusted basis is the sal- tax years (unless the change was made a single rate of depreciation assigned to the vage value estimated for the item of property under the Class Life System), entire account. when it was originally acquired. If you figured 2) Class Life Asset Depreciation Range Sys- Sale or exchange. If property is retired by depreciation using the maximum expected tem, and sale or exchange, you figure gain or loss by useful life of the longest lived item of property

3) Public utility property. the usual rules that apply to sales or other dis- in the account, you must use the depreciation

positions of property. See Publication 544. method used for the multiple property account

You must request and receive permission Property not disposed of or aban- and a rate based on the maximum expected

for these changes. To make the request, file doned. If property is retired permanently, but useful life of the item of property retired.

Form 3115 during the first 180 days of the tax not disposed of or physically abandoned, you You make the adjustment for depreciation

year for which you want the change to be do not recognize gain. You are allowed a loss for an abnormal retirement from a multiple

effective. in such a case, but only if the retirement is: property account at the rate that would be

proper if the item of property was depreciated 1) An abnormal retirement, Change from an improper method. If the in a single property account. The method of 2) A normal retirement from a single prop- IRS disallows the method you are using, you depreciation used for the multiple property ac- erty account in which you determined the do not need permission to change to a proper count is used. You base the rate on either the

life of each item of property separately, or method. You can adopt the straight line average expected useful life or the maximum

method, or any other method that would have 3) A normal retirement from a multiple prop- expected useful life of the retired item of propbeen permitted if you had used it from the be- erty account in which the depreciation erty, depending on the method used to deterginning. If you file your tax return using an im- rate is based on the maximum expected mine the depreciation rate for the multiple

proper method, but later file an amended re- life of the longest lived item of property property account.

turn, you can use a proper method on the and the loss occurs before the expiration

amended return without getting IRS permis- of the full useful life. However, you are not

sion. However, you must file the amended re- allowed a loss if the depreciation rate is

turn before the filing date for the next tax year. based on the average useful life of the

items of property in the account. 3.

To figure your loss, subtract the estimated Dispositions salvage or fair market value of the property at Listed Property Retirement is the permanent withdrawal of de- the date of retirement, whichever is more,

preciable property from use in your trade or from its adjusted basis.

business or for the production of income. You Special rule for normal retirements Topics can do this by selling, exchanging, or aban- from item accounts. You can generally de- This chapter discusses: doning the item of property. You can also with- duct losses upon retirement of a few depreciadraw it from use without disposing of it. For ex- ble items of property with similar useful lives, ● Listed property defined

ample, you could place it in a supplies or scrap if: ● The predominant use test account. Retirements can be either normal or 1) You account for each one in a separate abnormal depending on all facts and circum- ● What records must be kept account, and stances. The rules discussed next do not ap- 2) You use the average useful life to figure ply to MACRS and ACRS property. Useful Items depreciation. You may want to see:

Normal retirement. A normal retirement is a

However, you cannot deduct losses if you use permanent withdrawal of depreciable property Publication the average useful life to figure depreciation from use if the following apply: and they have a wide range of useful lives. □ 463 Travel, Entertainment, and Gift 1) The retirement is made within the useful If you have a large number of depreciable Expenses life you estimated originally, and property items and use average useful lives to □ 587 Business Use of Your Home 2) The property has reached a condition at figure depreciation, you cannot deduct the (Including Use by Day-Care Providers) which you customarily retire or would re- losses upon normal retirements from these

□ 917 Business Use of a Car tire similar property from use. accounts.

Abandoned property. If you physically □ 946 How To Depreciate Property

A retirement is generally considered normal abandon property, you can deduct as a loss

unless you can show that you retired the prop- the adjusted basis of the property at the time Form (and Instructions) erty because of a reason you did not consider of its abandonment. However, your intent

when you originally estimated the useful life of must be to discard the property so that you will □ 2106–EZ Unreimbursed Employee

not use it again or retrieve it for sale, ex- Business Expenses the property.

change, or other disposition. □ 2106 Employee Business Expenses

Abnormal retirement. A retirement can be □ 4255 Recapture of Investment Credit abnormal if you withdraw the property early or Basis of property retired. The basis for figunder other circumstances. For example, if the uring gain or loss on the retirement of property □ 4562 Depreciation and Amortization

Chapter 3 LISTED PROPERTY Page 9
This chapter discusses some special rules Other Property Used for and recordkeeping requirements for listed Predominant Use Test Transportation property. For complete coverage of the rules,

including the rules concerning passenger au- Other property used for transportation in- If ‘‘listed property,’’ defined earlier, placed in

tomobiles, see Publication 946. cludes trucks, buses, boats, airplanes, service after June 18, 1984, is not used

motorcycles, and any other vehicles for trans- predominantly (more than 50%) in a qualified If listed property is not used predominantly business use during any tax year: (more than 50%) in a qualified business use as porting persons or goods.

discussed in Predominant Use Test, later, the Listed property does not include: ● The section 179 deduction on the property

section 179 deduction is not allowable and the is not allowable, and 1) Any vehicle which, by reason of its de- property must be depreciated using the sign, is not likely to be used more than a ● You must depreciate the property using the straight line method. minimal amount for personal purposes, straight line method.

such as clearly marked police and fire vehicles, ambulances, or hearses used for Listed property placed in service before

Listed Property Defined those purposes, 1987. For listed property placed in service

before 1987, depreciate the property over the 2) Any vehicle that is designed to carry Listed property is any of the following: following period: cargo and that has a loaded gross vehicle

1) Any passenger automobile (defined later), weight over 14,000 pounds, bucket trucks Class of Listed Property 

2) Any other property used for (cherry pickers), cement mixers, com- Property Recovery Period 

transportation, bines, cranes and derricks, delivery trucks 3–year property ................ 5 years with seating only for the driver (or only for 3) Any property of a type generally used for 5–year property ................ 12 years the driver plus a folding jump seat), dump entertainment, recreation, or amusement 10–year property .............. 25 years trucks (including garbage trucks), flatbed (including photographic, phonographic, 18–year real property .......... 40 years trucks, forklifts, qualified moving vans, communication, and video recording 19–year real property .......... 40 years qualified specialized utility repair trucks, equipment), and refrigerated trucks, If you must use the above recovery periods for 4) Any computer and related peripheral listed property not used predominantly in a 3) Any passenger bus used for that purpose equipment, defined later, unless it is used with a capacity of at least 20 passengers trade or business, use the percentages from only at a regular business establishment Table 16 titled Listed Property Not Used and school buses, and owned or leased by the person oper- Predominantly (Other Than 18– or 19–year ating the establishment. A regular busi- 4) Any tractor or other special purpose farm Real Property), and Table 17 for 18– or 19–

ness establishment includes a portion of vehicle, and unmarked vehicles used by year real property, near the end of this a dwelling unit (defined later), if, and only law enforcement officers if the use is offi- publication in the Appendix. if, that portion is used both regularly and cially authorized, and

exclusively for business as discussed in 5) Any vehicle, such as a taxicab, if substan- Listed property placed in service after Publication 587. tially all its use is in the trade or business 1986. For information on listed property

5) Any cellular telephone (or similar tele- of providing services to transport persons placed in service after 1986, see Publication

communication equipment) placed in ser- or property for compensation or hire by 946.

vice or leased in a tax year beginning after unrelated persons.

1989. Meeting the Predominant

Use Test Computers and Related Listed property meets the predominant use Passenger Automobile Peripheral Equipment test for any tax year if its business use is more

Defined A computer is a programmable electronically than 50% of its total use. You must allocate

A passenger automobile is any four-wheeled activated device that: the use of any item of listed property used for

vehicle made primarily for use on public more than one purpose during the tax year 1) Is capable of accepting information, ap- streets, roads, and highways and rated at among its various uses. The percentage of in- plying prescribed processes to the infor- 6,000 pounds or less of unloaded gross vehi- vestment use of listed property cannot be mation, and supplying the results of those cle weight (at 6,000 pounds or less of gross used as part of the percentage of qualified processes with or without human inter- vehicle weight for trucks and vans). It includes business use to meet the predominant use vention, and any part, component, or other item physically test. However, the combined total of business

attached to the automobile or usually included 2) Consists of a central processing unit with and investment use is taken into account to

in the purchase price of an automobile. extensive storage, logic, arithmetic, and figure your depreciation deduction for the

A passenger automobile does not include: control capabilities. property.

1) An ambulance, hearse, or combination Related peripheral equipment is any auxil- Note: Property does not stop being ambulance-hearse used directly in a trade iary machine which is designed to be con- predominantly used in a qualified business use or business, and because of a transfer at death. trolled by the central processing unit of a

2) A vehicle used directly in the trade or bus- computer. Example. Sarah Bradley uses a home iness of transporting persons or property Computer or peripheral equipment does computer 50% of the time to manage her in- for compensation or hire. not include: vestments. She also uses the computer 40%

1) Any equipment which is an integral part of of the time in her part-time consumer research

property which is not a computer, business. Sarah’s home computer is listed Dwelling Unit property because it is not used at a regular 2) Typewriters, calculators, adding and ac- A dwelling unit is a house or apartment used to business establishment. Because her busi- counting machines, copiers, duplicating provide living accommodations in a building or ness use of the computer does not exceed equipment, and similar equipment, and structure. It does not include a unit in a hotel, 50%, the computer is not predominantly used

motel, inn, or other establishment where more 3) Equipment of a kind, used primarily for the in a qualified business use for the tax year. Bethan half the units are used on a transient user’s amusement or entertainment, such cause she does not meet the predominant use

basis. as video games. test, she cannot elect a section 179 deduction

Page 10 Chapter 3 LISTED PROPERTY
for this property. Her combined rate of busi- Use of Your Passenger Method of Allocating Use ness/investment use for determining her de- Automobile by Another Person For passenger automobiles and other means preciation deduction is 90%. If someone else uses your automobile, that of transportation, allocate the property’s use

use is not business use unless: on the basis of mileage. You determine the

Qualified Business Use percentage of qualified business use by divid- 1) That use is directly connected with your ing the number of miles the vehicle is driven A qualified business use is any use in your business, for business purposes during the year by the trade or business. However, it does not 2) The value of the use is property reported total number of miles the vehicle is driven for include: by you as income to the other person and all purposes (including business miles) during

1) The use of property held merely to pro- tax is withheld on the income where re- the year.

duce income (investment use), quired, or For other items of listed property, allocate

the property’s use on the basis of the most ap- 2) The leasing of property to any 5% owner 3) The value of the use results in a payment propriate unit of time. For example, you can or related person of fair market rent. (to the point that the determine the percentage of business use of a property is used by a 5% owner or person computer by dividing the number of hours the related to the owner or lessee of the Any payment to you for the use of the automo- computer is used for business purposes dur- property), bile is treated as a rent payment for 3). ing the year by the total number of hours the

3) The use of property as compensation for computer is used for all purposes (including Employees business hours) during the year. the performance of services by a 5%

owner or related person, or Any use by an employee of his or her own

listed property (or listed property rented by an Applying the Predominant 4) The use of property as compensation for employee) in performing services as an em- the performance of services by any per- ployee is not business use unless: Use Test 

son (other than a 5% owner or related You must apply the predominant use test for ● The use is for the employer’s convenience, person) unless the value of the use is in- an item of listed property each year of the re- and cluded in that person’s gross income for covery period.

the use of the property and income tax is ● The use is required as a condition of

withheld on that amount where required. employment. First Recovery Year See Employees, later. If any item of listed property is not used

Use for the employer’s convenience. predominantly in a qualified business use in

5% owner. A 5% owner of a business, other Whether the use of listed property is for the the year it is placed in service:

than a corporation, is any person who owns employer’s convenience must be determined 1) The property is not eligible for a section more than 5% of the capital or profits interest from all the facts. The use is for the employer’s 179 deduction, and in the business. convenience if it is for a substantial business

2) The depreciation deduction must be fig- A 5% owner of a corporation is any person reason of the employer. The use of listed property during the employee’s regular working ured using the straight line method. who owns, or is considered to own:

hours to carry on the employer’s business is ● More than 5% of the outstanding stock of generally for the employer’s convenience. the corporation, or Note: The required use of the straight line

method for an item of listed property that does ● Stock possessing more than 5% of the total Use required as a condition of employment. not meet the predominant use test is not the combined voting power of all stock in the Whether the use of listed property is a same as electing the straight line method. It corporation. condition of employment depends on all the does not mean that you have to use the facts and circumstances. The use of property

must be required for the employee to perform straight line method for other property in the Related person. A related person is anyone same class as the item of listed property. duties properly. The employer need not explic- related to a taxpayer as discussed under Re- itly require the employee to use the property. A lated persons, in chapter 2 under Nonqualifying Property in Publication 946. mere statement by the employer that the use Years After the First Recovery of the property is a condition of employment is Year not sufficient.

Entertainment Use If you use listed property predominantly (more

Example 1. Virginia Sycamore is em- than 50%) in a qualified business use in the The use of listed property for entertainment, ployed as a courier with We Deliver which pro- tax year you place it in service, but not in a recreation, or amusement purposes is treated vides local courier services. She owns and subsequent tax year during the recovery pe- as a qualified business use only to the extent uses a motorcycle to deliver packages to riod, the following rules apply: that expenses (other than interest and prop- downtown offices. We Deliver explicitly re- 1) Figure depreciation using the straight line erty tax expenses) for its use are deductible as quires all delivery persons to own a small car method. Do this for each year, beginning ordinary and necessary business expenses. or motorcycle for use in their employment. The with the year you no longer use the prop- See Publication 463. company reimburses delivery persons for their erty predominantly in a qualified business costs. Virginia’s use of the motorcycle is for use, and Leasing or Compensatory Use of the convenience of We Deliver and is required

as a condition of employment. 2) Figure any excess depreciation on the Aircraft property and add it to: Example 2. Bill Nelson is an inspector for If at least 25% of the total use of any aircraft Uplift, a construction company with many sites Your gross income, and during the tax year is for a qualified business in the local area. He must travel to these sites The adjusted basis of your property. use, the leasing or compensatory use of the on a regular basis. Uplift does not furnish an aircraft by a 5% owner or related person is automobile or explicitly require him to use his See Recapture of excess depreciation, next. treated as a qualified business use. own automobile. However, it reimburses him

for any costs he incurs in traveling to the vari- Recapture of excess depreciation. You Commuting ous sites. The use of his own automobile or a must include any excess depreciation in your

The use of a vehicle for commuting is not busi- rental automobile is for the convenience of gross income for the first tax year the property

ness use, regardless of whether work is per- Uplift and is required as a condition of is not predominantly used in a qualified busiemployment. formed during the trip. ness use. Any excess depreciation must also

Chapter 3 LISTED PROPERTY Page 11
be added to the adjusted basis of your prop- property for personal purposes and charges

erty. Excess depreciation is the excess (if any) the employee for the use is not regularly en- What Records Must Be

of: gaged in the business of leasing the property

used by the employee. Kept 1) The amount of depreciation allowable for

the property (including any section 179 You cannot take any depreciation or section

deduction claimed) for tax years before 179 deduction for the use of listed property (in- Lessee the first tax year the property was not cluding passenger automobiles) unless you

predominantly used in a qualified busi- can prove business/investment use with ade- A lessee of listed property (other than passen- ness use, over quate records or sufficient evidence to support ger automobiles), must include an amount in your own statements. 2) The amount of depreciation that would gross income called the inclusion amount for

have been allowable for those years if the the first tax year the property is not used How long to keep records. For listed prop- property were not used predominantly in predominantly in a qualified business use. erty, records must be kept for as long as any a qualified business use for the year it

was placed in service. This means you fig- excess depreciation can be recaptured (inInclusion amount for property leased cluded in income). ure your depreciation using the percentages from Table 16 or 17. before 1987. You determine the inclusion

amount for property leased after June 18, Adequate Records 1984 and before 1987 by multiplying the fair For information on investment credit recap- To meet the adequate records requirement, market value of the property by both the aver- ture, see the instructions for Form 4255. you must maintain an account book, diary, log, age business/investment use percentage and statement of expense, trip sheet, or similar re- the applicable percentage. You can find the cord or other documentary evidence that, to- applicable percentages for listed property that Deductions After gether with the receipt, is sufficient to estab- is 5– or 10–year recovery property in Tables 19 lish each element of an expenditure or use. It or 20 in Appendix A of Publication 946. Recovery Period is not necessary to record information in an

The lease term for listed property other account book, diary, or similar record if the in- When listed property (other than passenger than 18– or 19–year real property, and resi- formation is already shown on the receipt. automobiles) is used for business, investment, dential rental or nonresidential real property, However, your records should back up your re- and personal purposes, no deduction is ever includes options to renew. For 18– or 19–year ceipts in an orderly manner. allowable for the personal use. In tax years af- real property and residential rental or nonresi- ter the recovery period, you must determine if dential real property that is listed property, the Elements of Expenditure or Use there is any unrecovered basis remaining period of the lease does not include any option The records or other documentary evidence before you compute the depreciation deduc- to renew at fair market value, determined at must support: tion for that tax year. To make this determina- the time of renewal. You treat two or more suction, figure the depreciation for earlier tax 1) The amount of each separate expendi- cessive leases that are part of the same trans- years as if your property were used 100% for ture, such as the cost of acquiring the action (or a series of related transactions) for business or investment purposes, beginning item, maintenance and repair costs, capi- the same or substantially similar property as with the first tax year in which some or all use tal improvement costs, lease payments, one lease. is for business or investment. See Car Used and any other expenses,

50% or Less for Business in Publication 917. 2) The amount of each business and invest- Special rules. The lessee adds the inclusion ment use (based on an appropriate mea- amount to gross income in the next tax year if: sure, such as mileage for vehicles and

Leased Property time for other listed property), and the to- The lease term begins within 9 months tal use of the property for the tax year,

The limitations on cost recovery deductions before the close of the lessee’s tax

3) The date of the expenditure or use, and apply to the rental of listed property. The fol- year,

lowing discussion covers the rules that apply 4) The business or investment purpose for

The lessee does not use the property the expenditure or use. to the lessor (the owner of the property) and

the lessee (the person who rents the property predominantly in a qualified business

from the owner). See Leasing a Car in Publica- use during that portion of the tax year, Written documents of your expenditure or

tion 917 for a discussion of leased passenger and use are generally better evidence than oral

automobiles. statements alone. A written record prepared

The lease term continues into the lessee’s at or near the time of the expenditure or use

next tax year. has greater value as proof of the expenditure Lessor or use. A daily log is not required. However, The limitations on cost recovery generally do some type of record containing the elements not apply to any listed property leased or held The lessee determines the inclusion amount of an expenditure or the business or invest- for leasing by anyone regularly engaged in the by taking into account the average of the busi- ment use of listed property made at or near the business of leasing listed property. ness/investment use for both tax years and time and backed up by other documents is A person is considered regularly en- the applicable percentage for the tax year the preferable to a statement prepared later. gaged in the business of leasing listed prop- lease term begins.

erty only if contracts for leasing of listed prop- If the lease term is less than one year, the Timeliness erty are entered into with some frequency over amount included in gross income is the The elements of an expenditure or use must a continuous period of time. This determina- amount that bears the same ratio to the addi- be recorded at the time you have full knowl- tion is made on the basis of the facts and cir- tional inclusion amount as the number of days edge of the elements. An expense account cumstances in each case and takes into ac- in the lease term bears to 365. statement made from an account book, diary, count the nature of the person’s business in its or similar record prepared or maintained at or entirety. Occasional or incidental leasing acMaximum inclusion amount. near the time of the expenditure or use is gen- tivity is insufficient. For example, a person The inclusion

amount cannot be more than the sum of the erally considered a timely record if in the regu- leasing only one passenger automobile during

deductible amounts of rent allocable to the lar course of business: a tax year is not regularly engaged in the business of leasing automobiles. An employer who 1) The statement is submitted by an em- lessee’s tax year in which the amount must be

allows an employee to use the employer’s included in gross income. ployee to the employer, or

Page 12 Chapter 3 LISTED PROPERTY
2) The statement is submitted by an inde- accounted for by a single record of miles trav- on page 2, Section B of Form 4562. If you

pendent contractor to the client or eled. Minimal personal use (such as a stop for claim a deduction for any vehicle, you must ancustomer. lunch between two business stops) is not an swer certain questions on page 2 of Form

interruption of business use. 4562 to provide information about the vehicle

For example, a log maintained on a weekly use.

basis, which accounts for use during the week, Confidential Information 

will be considered a record made at or near Employees. Employees claiming the stan- If any of the information on the elements of an the time of use. dard mileage rate or actual expenses (includ- expenditure or use is confidential, it does not ing depreciation) must use Form 2106 instead need to be in the account book or similar reBusiness Purpose Supported of Part V of Form 4562. Employees claiming cord if it is recorded at or near the time of the

An adequate record of business purpose must expenditure or use. It must be kept elsewhere the standard mileage rate may be able to use

Form 2106–EZ. generally be in the form of a written statement. and made available as support to the district

However, the amount of backup necessary to director on request. Employer who provides vehicles to em- establish a business purpose depends on the ployees. An employer who provides vehicles facts and circumstances of each case. A writ- Substantial Compliance to employees must obtain enough information ten explanation of the business purpose will If you have not fully supported a particular ele- from those employees to provide the re- not be required if the purpose can be deter- ment of an expenditure or use, but have com- mined from the surrounding facts and circum- quested information on Form 4562. plied with the adequate records requirement An employer who provides more than five stances. For example, a salesperson visiting for the expenditure or use to the district direc- vehicles to employees need not include any customers on an established sales route will tor’s satisfaction, you can establish this ele- information on his or her tax return. Instead, not normally need a written explanation of the ment by any evidence the district director business purpose of his or her travel. the employer must obtain the information from deems adequate. his or her employees and indicate on his or her If you fail to establish that you have sub- return that the information was obtained and is Business Use Supported stantially complied with the adequate records being retained. An adequate record contains enough informa- requirement for an element of an expenditure You do not need to provide the information tion on each element of every business or in- or use to the district director’s satisfaction, you requested on page 2 of Form 4562 if, as an vestment use. The amount of detail required to must establish the element: employer: support the use depends on the facts and cir- 1) By your own oral or written statement cumstances. For example, a taxpayer whose 1) You can satisfy the requirements of a writ- containing detailed information as to the only business use of a truck is to make cus- ten policy statement for vehicles either element, and not used for personal purposes, or not tomer deliveries on an established route can

satisfy the requirement by recording the length 2) By other evidence sufficient to establish used for personal purposes other than

of the route, including the total number of the element. commuting, or

miles driven during the tax year and the date of 2) You treat all vehicle use by employees as If the element is the cost or amount, time, each trip at or near the time of the trips. personal use. place, or date of an expenditure or use, its sup- Although an adequate record generally porting evidence must be direct, such as oral must be written, a record of the business use See the instructions for Form 4562. testimony by witnesses or a written statement of listed property, such as a computer or auto- setting forth detailed information about the el- mobile, can be prepared in a computer mem- ement or the documentary evidence. If the el- ory device using a logging program. ement is the business purpose of an expendi- Deductions in Later

ture, its supporting evidence can be Separate or Combined circumstantial evidence. Years 

Expenditures or Uses When listed property is used for business, in- Each use by you is normally considered a sep- Sampling vestment, and personal purposes, no deduc- arate use. However, repeated uses can be You can maintain an adequate record for por- tion is allowable for its personal use either in combined as a single item. tions of a tax year and use that record to sup- the current year or any later tax year. In later Each expenditure is recorded as a sepa- port your business and investment use for the years, you must determine if there is any re- rate item and not combined with other expend- entire tax year if it can be shown by other evi- maining unadjusted or unrecovered basis itures. If you choose, however, amounts spent dence that the periods for which an adequate before you compute the depreciation deduc- for the use of listed property during a tax year, record is maintained are representative of use tion for that tax year. In making this determina- such as for gasoline or automobile repairs, can throughout the year. tion, figure the depreciation deductions for be combined. If these expenses are com- earlier tax years as if the listed property were bined, you do not need to support the busi- Loss of Records used 100% for business or investment pur- ness purpose of each expense. Instead, you When you establish that failure to produce ad- poses in those years, beginning with the first can divide the expenses based on the total tax year in which some or all of the property equate records is due to loss of the records business use of the listed property. use is for business or investment. Uses which can be considered part of a through circumstances beyond your control, For more information about deductions af- such as through fire, flood, earthquake, or single use, such as a round trip or uninter- ter the recovery period for automobiles, see other casualty, you have the right to support a rupted business use, can be accounted for by Publication 917. deduction by reasonable reconstruction of a single record. For example, use of a truck to

make deliveries at several locations which be- your expenditures and use.

gin and end at the business premises and can

include a stop at the business in between de- Reporting Information Appendix liveries can be accounted for by a single re- on Form 4562 The following tables are for use in figuring de- cord of miles driven. Use of a passenger auto- If you claim a deduction for any listed property, preciation deductions under the ACRS mobile by a salesperson for a business trip you must provide the requested information system. away from home over a period of time can be

Page 13
Appendix

ACRS PERCENTAGE TABLES

Table 1. 15-Year Real Property* (Other Than Low-Income Housing)

Month Placed in Service Year

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

1st 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0%

2nd 10.0 10.0 11.0 11.0 11.0 11.0 11.0 11.0 11.0 11.0 11.0 12.0

3rd 9.0 9.0 9.0 9.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0

4th 8.0 8.0 8.0 8.0 8.0 8.0 9.0 9.0 9.0 9.0 9.0 9.0

5th 7.0 7.0 7.0 7.0 7.0 7.0 8.0 8.0 8.0 8.0 8.0 8.0

6th 6.0 6.0 6.0 6.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0

7th 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0

8th 6.0 6.0 6.0 6.0 6.0 6.0 5.0 6.0 6.0 6.0 6.0 6.0

9th 6.0 6.0 6.0 6.0 5.0 6.0 5.0 5.0 5.0 6.0 6.0 6.0

10th 5.0 6.0 5.0 6.0 5.0 5.0 5.0 5.0 5.0 5.0 6.0 5.0

11th 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

12th 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

13th 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

14th 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

15th 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

16th — — 1.0 1.0 2.0 2.0 3.0 3.0 4.0 4.0 4.0 5.0

* Placed In Service After 1980 and Before March 16, 1984

Table 2. Low-Income Housing*

Month Placed in Service

Year

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

1st 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 4.0% 3.0% 2.0% 1.0%

2nd 12.0 12.0 12.0 12.0 12.0 12.0 12.0 13.0 13.0 13.0 13.0 13.0

3rd 10.0 10.0 10.0 10.0 11.0 11.0 11.0 11.0 11.0 11.0 11.0 11.0

4th 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 10.0 10.0 10.0 10.0

5th 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 9.0

6th 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0

7th 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0

8th 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 6.0 6.0

9th 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

10th 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

11th 4.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

12th 4.0 4.0 4.0 5.0 4.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

13th 4.0 4.0 4.0 4.0 4.0 4.0 5.0 4.0 5.0 5.0 5.0 5.0

14th 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 5.0 4.0 4.0

15th 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0

16th — — 1.0 1.0 2.0 2.0 2.0 3.0 3.0 3.0 4.0 4.0

* Placed In Service After 1980 and Before May 9, 1985

Page 14
Table 3. Low-Income Housing*

Month Placed in Service Year

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

1st 13.3% 12.2% 11.1% 10.0% 8.9% 7.8% 6.6% 5.6% 4.4% 3.3% 2.2% 1.1%

2nd 11.6 11.7 11.9 12.0 12.1 12.3 12.5 12.6 12.7 12.9 13.0 13.2

3rd 10.0 10.1 10.2 10.4 10.5 10.7 10.8 10.9 11.1 11.2 11.3 11.4

4th 8.7 8.8 8.9 9.0 9.1 9.2 9.3 9.5 9.6 9.7 9.8 9.9

5th 7.5 7.6 7.7 7.8 7.9 8.0 8.1 8.2 8.3 8.4 8.5 8.6

6th 6.5 6.6 6.7 6.8 6.9 6.9 7.0 7.1 7.2 7.3 7.4 7.4

7th 5.7 5.7 5.8 5.9 5.9 6.0 6.1 6.1 6.2 6.3 6.4 6.5

8th 4.9 5.0 5.0 5.1 5.2 5.2 5.3 5.3 5.4 5.5 5.5 5.6

9th 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.7 4.8 4.8

10th 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6

11th 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6

12th 4.5 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6

13th 4.5 4.5 4.6 4.5 4.6 4.6 4.6 4.6 4.6 4.5 4.6 4.6

14th 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.6 4.6 4.5 4.5 4.5

15th 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5

16th 0.4 0.7 1.1 1.5 1.9 2.3 2.6 3.0 3.4 3.7 4.1

* Placed In Service After May 8, 1985, and Before 1987

ACRS PERCENTAGE TABLES

Table 4. 18-Year Real Property*

Month Placed in Service

Year

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

1st 9.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 4.0% 3.0% 2.0% 1.0% 0.4%

2nd 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 10.0 10.0 10.0

3rd 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 9.0 9.0 9.0 9.0

4th 7.0 7.0 7.0 7.0 7.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0

5th 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0

6th 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0

7th 5.0 5.0 5.0 5.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0

8-12th 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

13th 4.0 4.0 4.0 5.0 4.0 4.0 5.0 4.0 4.0 4.0 5.0 5.0

14-17th 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0

18th 4.0 3.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0

19th 1.0 1.0 1.0 2.0 2.0 2.0 3.0 3.0 3.0 3.0 3.6

* Placed In Service After June 22, 1984, and Before May 9, 1985

Table 5. 18-Year Real Property*

Month Placed in Service

Year

123456789 10-11 12

1st 10.0% 9.0% 8.0% 7.0% 6.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0%

2nd 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 10.0 10.0

3rd 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 9.0 9.0 9.0

4th 7.0 7.0 7.0 7.0 7.0 7.0 8.0 8.0 8.0 8.0 8.0

5th 6.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0

6th 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0

7th 5.0 5.0 5.0 5.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0

8-12th 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

13th 4.0 4.0 4.0 5.0 5.0 4.0 4.0 5.0 4.0 4.0 4.0

14-18th 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0

19th 1.0 1.0 1.0 2.0 2.0 2.0 3.0 3.0 4.0

* Placed In Service After March 15 and Before June 23, 1984

Page 15
Table 6. 19-Year Real Property*

Month Placed in Service Year

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

1st 8.8% 8.1% 7.3% 6.5% 5.8% 5.0% 4.2% 3.5% 2.7% 1.9% 1.1% 0.4%

2nd 8.4 8.5 8.5 8.6 8.7 8.8 8.8 8.9 9.0 9.0 9.1 9.2

3rd 7.6 7.7 7.7 7.8 7.9 7.9 8.0 8.1 8.1 8.2 8.3 8.3

4th 6.9 7.0 7.0 7.1 7.1 7.2 7.3 7.3 7.4 7.4 7.5 7.6

5th 6.3 6.3 6.4 6.4 6.5 6.5 6.6 6.6 6.7 6.8 6.8 6.9

6th 5.7 5.7 5.8 5.9 5.9 5.9 6.0 6.0 6.1 6.1 6.2 6.2

7th 5.2 5.2 5.3 5.3 5.3 5.4 5.4 5.5 5.5 5.6 5.6 5.6

8th 4.7 4.7 4.8 4.8 4.8 4.9 4.9 5.0 5.0 5.1 5.1 5.1

9th 4.2 4.3 4.3 4.4 4.4 4.5 4.5 4.5 4.5 4.6 4.6 4.7

10-19th 4.2 4.2 4.2 4.2 4.2 4.2 4.2 4.2 4.2 4.2 4.2 4.2

20th 0.2 0.5 0.9 1.2 1.6 1.9 2.3 2.6 3.0 3.3 3.7 4.0

* Placed In Service After May 8, 1985, and Before 1987

Table 7. 18-Year Real Property*

Month Placed in Service Year

1-2 3-4 5-7 8-9 10-11 12

1st 5.0% 4.0% 3.0% 2.0% 1.0% 0.2%

2-10th 6.0 6.0 6.0 6.0 6.0 6.0

11th 5.0 5.0 5.0 5.0 5.0 5.8

12-18th 5.0 5.0 5.0 5.0 5.0 5.0

19th 1.0 2.0 3.0 4.0 5.0 5.0

* Placed In Service After June 22, 1984

If Alternate ACRS Method Elected Over 18-Year Period

Table 8. 18-Year Real Property*

Month Placed in Service Year

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

1st 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.5%

2-10th 6.0 6.0 6.0 6.0 6.0 6.0 6.0

11th 5.0 5.0 5.0 5.0 5.0 5.0 5.5

12-18th 5.0 5.0 5.0 5.0 5.0 5.0 5.0

19th 1.0 2.0 3.0 4.0 5.0 5.0

* Placed In Service After March 15 and Before June 23, 1984

If Alternate ACRS Method Elected Over 18-Year Period

Table 9. 19-Year Real Property*

Month Placed in Service Year

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

1st 5.0% 4.6% 4.2% 3.7% 3.3% 2.9% 2.4% 2.0% 1.5% 1.1% 0.7% 0.2%

2-13th 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3

14-19th 5.2 5.2 5.2 5.2 5.2 5.2 5.2 5.2 5.2 5.2 5.2 5.2

20th 0.2 0.6 1.0 1.5 1.9 2.3 2.8 3.2 3.7 4.1 4.5 5.0

* If Alternate ACRS Method Elected Over 19-Year Period

Page 16
Table 10. 18-Year Real Property*

Month Placed in Service Year

1-2 3-6 7-10 11 12

1st 3.0% 2.0% 1.0% 0.4% 0.1%

2-30th 3.0 3.0 3.0 3.0 3.0

31st 2.0 2.0 2.0 2.6 2.9

32-35th 2.0 2.0 2.0 2.0 2.0

36th 1.0 2.0 2.0 2.0

* Placed In Service After June 22, 1984

If Alternate ACRS Method Elected Over 35-Year Period

Table 11. 18-Year Real Property1

15-Year Real Property and

Low-Income Housing2

Month Placed in Service Year

1-2 3-6 7-12

1st 3.0% 2.0% 1.0%

2-30th 3.0 3.0 3.0

31-35th 2.0 2.0 2.0

36th 1.0 2.0 1

 Placed In Service After March 15 and Before June

23, 1984

2

 Placed In Service Before May 9, 1985

If Alternate ACRS Method Elected Over 35-Year

Period

Table 12. Low-Income Housing*

Month Placed in Service Year

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

1st 2.9% 2.6% 2.4% 2.1% 1.9% 1.7% 1.4% 1.2% 1.0% 0.7% 0.5% 0.2%

2-20th 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9

21-35th 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8

36th 0.3 0.5 0.8 1.0 1.2 1.5 1.7 1.9 2.2 2.4 2.7

*Placed In Service after May 8, 1985

If Alternate ACRS Method Elected Over 35-Year Period

Table 13. 19-Year Real Property*

Month Placed in Service Year

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

1st 2.7% 2.5% 2.3% 2.0% 1.8% 1.5% 1.3% 1.1% 0.8% 0.6% 0.4% 0.1%

2-20th 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9

21-35th 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8

36th 0.2 0.4 0.6 0.9 1.1 1.4 1.6 1.8 2.1 2.3 2.5 2.8

*If Alternate ACRS Method Elected Over 35-Year Period

Page 17
Table 14. 18-Year Real Property1

19-Year Real Property2

Month Placed in Service Year

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

1st 2.1% 1.9% 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.5% 0.3% 0.1%

2-11th 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3

12-45th 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2

46th 0.1 0.3 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.7 1.9 2.1 1

Placed In Service After June 22, 1984

2

If Alternate ACRS Method Elected Over a 45-Year Period

Table 15. 18-Year Real Property1

15-Year Real Property and Low-Income Housing2

Month Placed in Service Year

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

1st 2.3% 2.0% 1.9% 1.7% 1.5% 1.3% 1.2% 0.9% 0.7% 0.6% 0.4% 0.2%

2-10th 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3

11-45th 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2

46th 0.3 0.4 0.6 0.8 1.0 1.1 1.4 1.6 1.7 1.9 2.1

1

Placed In Service After March 15 and Before June 23, 1984

2

Placed In Service After December 31, 1980

If Alternate ACRS Method Elected Over a 45-Year Period

Table 16. Listed Property Not Used

Predominantly (Other Than

18 or 19 Year Real Property)

Recovery Period Year

5 12 25

1st 10.0% 4.0% 2.0%

2nd-5th 20.0 9.0 4.0

6th 10.0 8.0 4.0

7th-12th — 8.0 4.0

13th — 4.0 4.0

14th-25th — — 4.0

26th — — 2.0

Table 17. 40-Year Recovery Period (For 18- or 19-Year Listed Property Not Used Predominantly)

Month Placed in Service Year

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

1st 2.4% 2.2% 2.0% 1.8% 1.6% 1.4% 1.1% 0.9% 0.7% 0.5% 0.3% 0.1%

2-40th 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5

41st 0.1 0.3 0.5 0.7 0.9 1.1 1.4 1.6 1.8 2.0 2.2 2.4

Page 18
Rented Listed Property Tables

Table 18. 3-Year Recovery Property

Lease Tax year during the lease term that the

Term business percentage decreases to 50% or less

1 2 3 4 5 6 and later

1 Year 3.00%

2 Years 6.00 1.25%

3 Years 10.20 6.20 2.25%

4 Years

or more 13.20 10.40 6.50 1.70% 0.50% 0.00%

Table 19. 5-Year Recovery Property

Lease Tax year during the lease term that the

Term business percentage decreases to 50% or less

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

1 Year 2.7%

2 Years 5.3 1.2%

3 Years 9.9 6.1 1.6%

4 Years 14.4 11.1 7.3 2.3%

5 Years 18.4 15.7 12.4 8.2 3.0%

6 Years

or more 21.8 19.6 16.7 13.5 9.6 5.25% 4.4% 3.6% 2.8% 1.8% 1.0% 0%

Table 20. 10-Year Recovery Property

Lease Tax year during the lease term that the

Term business percentage decreases to 50% or less

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

1 Year 2.5%

2 Years 5.1 0.6%

3 Years 9.8 5.6 1.0%

4 Years 14.0 10.3 6.2 1.4%

5 Years 17.9 14.5 10.9 6.7 1.8%

6 Years 21.3 18.3 15.1 11.4 7.1 2.1%

7 Years 21.9 19.0 15.9 12.4 8.4 3.9 2.4%

8 Years 22.4 19.6 16.7 13.4 9.7 5.5 4.5 2.7%

9 Years 22.9 20.2 17.4 14.3 10.9 7.0 6.4 5.1 3.0%

10 Years 23.5 20.9 18.2 15.2 11.9 8.3 8.1 7.2 5.7 3.3%

11 Years 23.9 21.4 18.8 16.0 12.8 9.3 9.4 8.9 7.7 5.9 3.1%

12 Years 24.3 21.9 19.3 16.5 13.4 10.1 10.3 10.0 9.3 7.8 5.5 2.9%

13 Years 24.7 22.2 19.7 16.9 14.0 10.7 11.1 11.0 10.4 9.2 7.4 5.2 2.7%

14 Years 25.0 22.5 20.1 17.3 14.4 11.1 11.6 11.7 11.3 10.3 8.8 6.9 4.8 2.5%

15 Years

or more 25.3 22.8 20.3 17.5 14.7 11.5 12.0 12.2 11.9 11.1 9.8 8.2 6.5 4.5 2.3%

Page 19
Index

Page 20