Statement of Facts Mortgage Interest on Form Worksheet

For this assignment:

Find and prepare PDF versions of the following IRS forms and Schedules, if applicable:Form 4562Schedule A, Schedule C, Schedule SE, Schedule 1; andForm 1040 (page 1 only).Statement of FactsTaxpayer Jane Doe has the following personal information:Name: Jane DoeSSN: 444-44-4444Address: 555 Any Street, Anytown, CA 90000Marital Status: Married Filing SeparateMinor Children: 0Elections: Itemized (first year is this year)Summary:Jane Doe (DOE) runs a successful bed and breakfast (the “Business”). The Business began in two years ago and has been in continuous operation ever since. The Business reports its financial activity using the cash-basis method (details below). DOE purchased the Business for $1,100,000. Upon purchasing the Business, DOE had her accountant perform a cost segregation study. DOE’s accountant allocated the purchase price, as detailed below. For all allocated personal property, DOE’s accountant claimed depreciation under IRC Section 168(k). All other assets were depreciated using their normal useful life and allowances.During the current year, DOE purchased the following assets and had the following financial activity:New Computer: $2,000 (Section 1.263(a)-1(f) election)New Cell Phone: $800 (Section 1.263(a)-1(f) election)New Furniture: $15,000State Tax Refund: $4,000Lotto winnings: $2,000Mortgage Interest on Form 1098: $30,000 (Bed and Breakfast)Mortgage Interest on Form 1098: $20,000 (Personal Residence – No Limit)State Income Taxes Paid: $4,000Property Taxes: $4,000 (Personal Residence)Property Taxes: $12,000 (Bed and Breakfast)Bed and Breakfast Business Financials:EIN: 55-5555555DBA: Sleepy Spoon InnAddress: 113 Sleepy Blvd. Anytown, CA 90000Payments received from customers: $210,000Payments made for her business:$22,000 supplies;$3,000 client transportation costs;$4,000 in accounting and legal fees;$12,000 in equipment rental fees;$30,000 in utilities;$30,000 in wages; and$7,000 in payroll taxes.Cost Segregation StudyEquipment and Personal Property: $300,000Land: $400,000Building: $400,000Total: $1,100,000Note: When preparing DOE’s tax return, please make any and all elections that will give DOE the lowest total income tax. For Simplicity, ignore any possible QBI deductions.According to the above statement, please answer the following questions:1. The reported net income on Schedule C of Form 1040 is: A. $57,000B. $31,944C. $46,944D. $210,002. Taxable income on Form 1040 is:A. $3,687B. $38,455C. $6,687 Increase in De Minimis Safe Harbor Limit for Taxpayers Without an Applicable Financial
Statement
Notice 2015-82
PURPOSE
This notice provides an increase in the de minimis safe harbor limit provided in
§ 1.263(a)-1(f)(1)(ii)(D) of the Income Tax Regulations for a taxpayer without an
applicable financial statement (“AFS”).
BACKGROUND
On September 17, 2013, the Treasury Department and the Internal Revenue
Service (“IRS”) issued final regulations under §§ 1.162-3, 1.162-4, 1.263(a)-1, 1.263(a)2, and 1.263(a)-3 (T.D. 9636, 2013-43 I.R.B. 331, 78 Fed. Reg. 57686) to provide
guidance on the application of §§ 162(a) and 263(a) of the Internal Revenue Code
(“Code”) to amounts paid to acquire, produce, or improve tangible property (“final
tangible property regulations”). The final tangible property regulations are applicable to
taxable years beginning on or after January 1, 2014. Optionally, a taxpayer may
choose to apply the final tangible property regulations to taxable years beginning on or
after January 1, 2012, and before January 1, 2014.
In addition to clarifying the requirements under §§ 162(a) and 263(a), the tangible
property regulations also include several simplifying provisions that are elective and
prospective in application, and are intended to ease taxpayers’ compliance with the
regulations and reduce administrative burden. Section 1.263(a)-1(f), for example,
-2provides a de minimis safe harbor election that permits a taxpayer to not capitalize, or
treat as a material or supply, certain amounts paid for tangible property that it acquires
or produces during the taxable year provided the taxpayer meets certain requirements
and the property does not exceed certain dollar limitations. If such requirements are
met, amounts paid for the qualifying property generally may be deducted under § 162,
provided the amount otherwise constitutes an ordinary and necessary business
expense in carrying on a trade or business. See § 1.263(a)-1(f)(3)(iv).
Under § 1.263(a)-1(f)(1)(ii)(D), a taxpayer without an AFS (as defined in
§ 1.263(a)-1(f)(4)) may elect to apply the de minimis safe harbor if, in addition to other
requirements, the amount paid for the property subject to the de minimis safe harbor
does not exceed $500 per invoice (or per item as substantiated by the invoice). In
contrast, under § 1.263(a)-1(f)(1)(i)(D), a taxpayer with an AFS may elect to apply the
de minimis safe harbor if, in addition to other requirements, the amount paid for the
property does not exceed $5,000 and the taxpayer treats the amount paid as an
expense on its AFS in accordance with its written accounting procedures. A larger safe
harbor limitation is reasonable for a taxpayer with an AFS because an AFS provides
independent assurance that the taxpayer’s de minimis policies are consistent with the
requirements of generally accepted accounting principles (“GAAP”) and do not
materially distort the taxpayer’s financial statement income.
The de minimis safe harbor provided under § 1.263(a)-1(f) was intended as an
administrative convenience whereby a taxpayer is permitted to deduct small dollar
expenditures for the acquisition or production of new property or for the improvement of
-3existing property, which otherwise must be capitalized under § 263(a). The de minimis
safe harbor does not limit a taxpayer’s ability to deduct otherwise deductible repair or
maintenance costs that exceed the amount subject to the safe harbor. The safe harbor
merely establishes a minimum threshold below which all qualifying amounts are
considered deductible. Consistent with longstanding federal income tax rules, a
taxpayer may continue to deduct all otherwise deductible repair or maintenance costs,
regardless of amount.
After the final tangible property regulations were issued, the Treasury
Department and the IRS received numerous letters from representatives of small
business taxpayers requesting that the Treasury Department and the IRS increase the
de minimis safe harbor limit for taxpayers that do not have an AFS. In Rev. Proc. 201520, 2015-9 I.R.B. 694, the Treasury Department and the IRS formally requested
comments on whether it is appropriate to increase the de minimis safe harbor limit
provided in § 1.263(a)-1(f)(1)(ii)(D) for a taxpayer without an AFS to an amount greater
than $500, and, if so, what amount should be used and the justification for considering
that amount appropriate.
DISCUSSION
The Treasury Department and the IRS received more than 150 comment letters
suggesting an increase in the amount of the de minimis safe harbor limit for taxpayers
without an AFS. The suggested increased amount ranged from $750 to $100,000.
Generally, commenters wrote that the $500 limitation was too low to effectively reduce
the administrative burden of complying with the capitalization requirement for small
-4business taxpayers that frequently purchase tangible property in their trades and
businesses. Commenters noted that the cost of many commonly expensed items (for
example, tablet-style personal computers, smart phones, and machinery and equipment
parts) typically surpass the current $500 per item or invoice threshold provided in
§ 1.263(a)-1(f)(1)(ii)(D). Commenters also stated that the $500 threshold does not
correspond to the financial accounting policies of many small businesses, which
frequently permit the deduction of amounts in excess of $500 as immaterial.
Commenters noted that without an increase in the de minimis safe harbor limit for
taxpayers without an AFS, a capitalization threshold in excess of $500 can only be
substantiated by establishing that a taxpayer’s policy results in the clear reflection of
income for federal income tax purposes, resulting in additional burden and uncertainty
for taxpayers. Finally, many commenters expressed concern regarding the disparate
treatment of taxpayers with an AFS compared to those without an AFS under the safe
harbor requirements, stating that obtaining an AFS is cost prohibitive for many small
businesses and does not adequately justify the substantially lower de minimis ceiling for
these taxpayers.
Section 1.263(a)-1(f)(1)(ii)(D) permits the IRS to change the safe harbor limit to
an amount identified in published guidance in the Federal Register or in the Internal
Revenue Bulletin (see § 601.601(d)(2)(ii)(b)).
Having considered taxpayers’ comments, the goal of the final tangible property
regulations to reduce administrative burden, and the concern that taxpayers’ methods of
accounting clearly reflect income, the § 1.263(a)-1(f)(1)(ii)(D) de minimis safe harbor
-5limitation for a taxpayer without an AFS is increased from $500 to $2,500.
EFFECTIVE DATE
This Notice is effective for costs incurred during taxable years beginning on or
after January 1, 2016.
AUDIT PROTECTION
For taxable years beginning before January 1, 2016, the IRS will not raise upon
examination the issue of whether a taxpayer without an AFS can utilize the de minimis
safe harbor provided in § 1.263(a)-1(f)(1)(ii) for an amount not to exceed $2,500 per
invoice (or per item as substantiated by invoice) if the taxpayer otherwise satisfies the
requirements of § 1.263(a)-1(f)(1)(ii). Moreover, if the taxpayer’s use of the de minimis
safe harbor provided in § 1.263(a)-1(f)(1)(ii) is an issue under consideration in
examination, appeals, or before the U.S. Tax Court in a taxable year that begins after
December 31, 2011, and ends before January 1, 2016, the issue relates to the
qualification under the safe harbor of an amount (or amounts) that does not exceed
$2,500 per invoice (or per item as substantiated by invoice), and the taxpayer otherwise
satisfies the requirements of § 1.263(a)-1(f)(1)(ii), then the IRS will not further pursue
the issue.
CONTACT INFORMATION
The principal author of this notice is Christine Merson of the Office of Associate
Chief Counsel (Income Tax and Accounting). For further information regarding this
notice, contact Ms. Merson at (202) 317-5100 (not a toll-free number).
Instructor Notes – Chapter 8
Why Depreciation
Large fixed assets cost money. However, these assets often have a useful life that extends beyond a
single tax year. To match the initial cost of the asset to the useful life of the asset (part of the matching
principle), the tax code allows taxpayers to recover the initial cost of large fixed assets through
depreciation. In essence the initial cost is divided by the useful life of the asset, with a portion of the
initial cost allowed each year.
Example: An asset costs $50,000 and has a 5 year useful life. Under the Straight Line Method of
depreciation, a taxpayer could claim a $10,000 depreciation deduction each year for five years to
recover the initial $50,000 cost.
Types of Property
Property includes both realty (real property) and personalty (personal property).
Realty: land and buildings permanently affixed to the land.
Personalty: any asset that is not realty, such as include furniture, machinery, and equipment.
IRS has created asset tables that provide the IRS approved useful lives for various different types of
assets. A summary of these tables is provided below. The tables can also be found in IRS Publication 946:
Table B-1 (starting on or around page 96 of the publication)
MACRS GDS property classes table
Type
Property Class Description
3-year
property
Special handling devices for food and beverage manufacture.
Special tools for the manufacture of finished plastic products,
fabricated metal products, and motor vehicles
Property with ADR class life of 4 years or less
5-year
property
Automobiles
Information Systems; Computers / Peripherals
Aircraft and parts (of non-air-transport companies)
Computers
Petroleum drilling equipment
Property with ADR class life of more than 4 years and less than 10
years
Certain geothermal, solar, and wind energy properties.
7-year
property
All other property not assigned to another class
Office furniture, fixtures, and equipment
Property with ADR class life of more than 10 years and less than 16
years
10-year
property
Assets used in petroleum refining and certain food products
Vessels and water transportation equipment
Property with ADR class life of 16 years or more and less than 20
years
15-year
Telephone distribution plants
Personal
Property
Instructor: Jerome Jenkins
Page 1
property
Real property
Instructor Notes – Chapter 8
Municipal sewage treatment plants
Property with ADR class life of 20 years or more and less than 25
years
20-year
property
Municipal sewers
Property with ADR class life of 25 years or more
27.5-year
property
Residential rental property (does not include hotels and motels)
39-year
property
Non-residential real property
Key Points:
Once an asset is placed in service, deprecation is allowable for each year the asset remains in service.
For each year an asset remains in service, the allowable depreciation is subtracted from the asset’s basis
to arrive at an adjusted basis (after depreciation).
If the taxpayer does not claim the allowable depreciation, the taxpayer’s basis is still reduced and
adjusted downward.
See Example 1 in the text. This rule is often referred to as “the greater of allowed or allowable”.
Personal Assets Converted to Business Use
Initial basis is the lesser of FMV or adjusted basis. In essence, if the asset has appreciated since the
taxpayer’s purchase, the taxpayer can only claim depreciation on the initial purchase price. If the asset
dropped in value during the time of personal use, the drop in value is considered a personal expense or
loss.
Depreciation Methods
Straight Line = Initial Asset Basis / Useful Life
200% and 150% Declining Balance (Use the tables in Pub 946). Short hand = 200%DB or 150%DB
Note: The extra deprecation claimed between 200%Db and 150%DB is added back for AMT purposes.
Depreciation Conventions
Half-Year (HY): Generally allowed for assets with shorter live. The majority of assets must not be
purchased in the last quarter of the year.
Mid-Quarter (MQ): If 40% of the total value of all assets purchased is placed in service in the last quarter
of the year, the taxpayer must use MQ.
Mid-Month (MM): Required for real property assets.
Example: Taxpayer buys furniture with a cost basis of $80,000. The taxpayer elects the 200% DB method
with a HY convention. Using Pub 946 and Table B-1, furniture is a 7 year asset under MACRS. Using Page
70 of Pub 946, the taxpayer will use Table A-1 to compute the actual depreciation for each year.
(Computation on next page…)
Instructor: Jerome Jenkins
Page 2
Year
1
2
3
4
5
6
7
8
Purchase Price
$80,000
Instructor Notes – Chapter 8
Depreciation %
14.29%
24.49%
17.49%
12.49%
8.93%
8.92%
8.93%
4.46%
Depreciation $
$11,432
$19,592
$13,992
$9,992
$7,144
$7,136
$7,144
$3,568
Accum. Dep.
$11,432
$31,024
$45,016
$55,008
$62,152
$69,288
$76,432
$80,000
Adj. Basis
$68,568
$48,976
$34,984
$24,992
$17,848
$10,712
$3,568
$0
Special Rules
De minimis safe harbor limit election provided in § 1.263(a)-1(f): To reduce the administrative burden
required to account for and depreciate small asset, the IRS allows all businesses to elect to expense
small assets if the total invoice amount for each item is $2,500 or less. This election is authorized by IRS
Notice 15-82 (in Canvas)
Section 179 Expensing: Allows taxpayers to fully write off (expense) shorter life assets (20 years or less),
up to certain amounts. Total amount allowed to be expensed is $1,050,000 in 2021. 179 Expensing
cannot create a loss (i.e. is limited to net income).
Additional Bonus Depreciation – Section 168(k): Allows taxpayers to fully write off (fully depreciate)
shorter life assets (20 years or less), by claiming 100% of the depreciation in year 1. Part of the TCJA law
changes. There are no limits on bonus depreciation, although 100% bonus deprecation will begin to
phase out in 2023.
Listed Property
This is basically personal use property, property that has a tenancy to personal use, and passenger
automobiles under 6,000 pounds in gross vehicular weight. In general, if property is not used 50% for
business, MACRS depreciation is allowed (SL only). The main point is to know what kind of asset is being
depreciated and, if listed property, know where to find and apply the listed property limits (e.g. luxury
auto limit).
ADS
ADS is basically straight line depreciation with longer asset lives that is mandated for certain assets. In
general, the main types of assets on ADS are: 1) listed property; 2) foreign property; 3) property where
163(j) applies and the taxpayer opts out of the limitations.
Amortization
This is like depreciation but for intangibles (e.g. startup cost, goodwill, patents, contacts in place, etc.).
Intangibles are amortized over 15 years using SL. Amortization is allowed under IRC 197. Some startup
costs can be expensed, but only up to a $5,000 limit.
Depletion
This is where value is extracted from land, such as mineral, oil, timber, etc.
Instructor: Jerome Jenkins
Page 3
Department of the Treasury
Internal Revenue Service
Publication 946
Contents
Future Developments . . . . . . . . . . . . . . . . . . . . . . . 2
What’s New for 2022 . . . . . . . . . . . . . . . . . . . . . . . . 2
Cat. No. 13081F
What’s New for 2023 . . . . . . . . . . . . . . . . . . . . . . . 2
How To
Depreciate
Property
Reminders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
• Section 179 Deduction
• Special Depreciation
Allowance
• MACRS
• Listed Property
For use in preparing
2022 Returns
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Chapter 1. Overview of Depreciation . . . . . . . . . . 3
What Property Can Be Depreciated? . . . . . . . . . . 3
What Property Cannot Be Depreciated? . . . . . . . . 6
When Does Depreciation Begin and End? . . . . . . 6
What Method Can You Use To Depreciate
Your Property? . . . . . . . . . . . . . . . . . . . . . . . . 7
What Is the Basis of Your Depreciable
Property? . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
How Do You Treat Repairs and
Improvements? . . . . . . . . . . . . . . . . . . . . . . 12
Do You Have To File Form 4562? . . . . . . . . . . . 13
How Do You Correct Depreciation
Deductions? . . . . . . . . . . . . . . . . . . . . . . . . . 13
Chapter 2. Electing the Section
179 Deduction . . . . . . . . . . . . . . . . . . . . . . . . 14
What Property Qualifies? . . . . . . . . . . . . . . . . . . 15
What Property Does Not Qualify? . . . . . . . . . . . 17
How Much Can You Deduct? . . . . . . . . . . . . . . . 17
How Do You Elect the Deduction? . . . . . . . . . . . 21
When Must You Recapture the Deduction? . . . . 22
Chapter 3. Claiming the Special
Depreciation Allowance . . . . . . . . . . . . . . . . . 22
What Is Qualified Property? . . . . . . . . . . . . . . . . 23
How Much Can You Deduct? . . . . . . . . . . . . . . . 25
How Can You Elect Not To Claim an
Allowance? . . . . . . . . . . . . . . . . . . . . . . . . . 25
When Must You Recapture an Allowance? . . . . . 26
Chapter 4. Figuring Depreciation
Under MACRS . . . . . . . . . . . . . . . . . . . . . . . . 26
Which Depreciation System (GDS or ADS)
Applies? . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Which Property Class Applies Under GDS? . . . . 27
What Is the Placed in Service Date? . . . . . . . . . . 30
What Is the Basis for Depreciation? . . . . . . . . . . 30
Which Recovery Period Applies? . . . . . . . . . . . . 31
Which Convention Applies? . . . . . . . . . . . . . . . . 32
Which Depreciation Method Applies? . . . . . . . . . 33
How Is the Depreciation Deduction Figured? . . . 34
How Do You Use General Asset Accounts? . . . . 45
When Do You Recapture MACRS
Depreciation? . . . . . . . . . . . . . . . . . . . . . . . . 50
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Feb 23, 2023
Chapter 5. Additional Rules for
Listed Property . . . . . . . . . . . . . . . . . . . . . . . . 50
What Is Listed Property? . . . . . . . . . . . . . . . . . . 51
Can Employees Claim a Deduction? . . . . . . . . . 52
What Is the Business-Use Requirement? . . . . . . 53
Do the Passenger Automobile Limits Apply? . . . . 57
What Records Must Be Kept? . . . . . . . . . . . . . . 61
How Is Listed Property Information
Reported? . . . . . . . . . . . . . . . . . . . . . . . . . . 63
How To Get Tax Help . . . . . . . . . . . . . . . . . . . . . . 63
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Appendix B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Future Developments
For the latest information about developments related to
Pub. 946, such as legislation enacted after this publication
was published, go to IRS.gov/Pub946.
What’s New for 2022
Section 179 deduction dollar limits. For tax years beginning in 2022, the maximum section 179 expense deduction is $1,080,000. This limit is reduced by the amount
by which the cost of section 179 property placed in service during the tax year exceeds $2,700,000.
Also, the maximum section 179 expense deduction for
sport utility vehicles placed in service in tax years beginning in 2022 is $27,000.
Depreciation limits on business vehicles. The total
section 179 deduction and depreciation you can deduct
for a passenger automobile, including a truck or van, you
use in your business and first placed in service in 2022 is
$19,200, if the special depreciation allowance applies, or
$11,200, if the special depreciation allowance does not
apply. See Maximum Depreciation Deduction in chapter 5.
What’s New for 2023
Section 179 deduction dollar limits. For tax years beginning in 2023, the maximum section 179 expense deduction is $1,160,000. This limit is reduced by the amount
by which the cost of section 179 property placed in service during the tax year exceeds $2,890,000.
Also, the maximum section 179 expense deduction for
sport utility vehicles placed in service in tax years beginning in 2023 is $28,900.
Phase down of special depreciation allowance. The
special depreciation allowance is 80% for certain qualified
property acquired after September 27, 2017, and placed
in service after December 31, 2022, and before January 1,
2024 (other than certain property with a long production
period and certain aircraft). The special depreciation allowance is also 80% for certain specified plants bearing
Page 2
fruits and nuts planted or grafted after December 31,
2022, and before January 1, 2024. See Certain Qualified
Property Acquired After September 27, 2017 and What Is
Qualified Property, later.
Reminders
Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for
Missing & Exploited Children® (NCMEC). Photographs of
missing children selected by the Center may appear in
this publication on pages that would otherwise be blank.
You can help bring these children home by looking at the
photographs
and
calling
1-800-THE-LOST
(1-800-843-5678) if you recognize a child.
Introduction
This publication explains how you can recover the cost of
business or income-producing property through deductions for depreciation (for example, the special depreciation allowance and deductions under the Modified Accelerated Cost Recovery System (MACRS)). It also explains
how you can elect to take a section 179 deduction, instead of depreciation deductions, for certain property and
the additional rules for listed property.
The depreciation methods discussed in this publication generally do not apply to property placed in
CAUTION service before 1987. For more information, see
Pub. 534, Depreciating Property Placed in Service Before
1987.
!
Definitions. Many of the terms used in this publication
are defined in the Glossary at the end of this publication.
Glossary terms used in each discussion under the major
headings are listed before the beginning of each discussion throughout the publication.
Do you need a different publication? The following table shows where you can get more detailed information
when depreciating certain types of property.
For information
on depreciating:
A car
See Publication:
463, Travel, Gift, and Car Expenses
Residential rental
527, Residential Rental Property
property
Office space in
your home
587, Business Use of Your Home
Farm property
225, Farmer’s Tax Guide
Comments and suggestions. We welcome your comments about this publication and your suggestions for future editions.
You can send us comments through IRS.gov/
FormComments. Or, you can write to the Internal
Publication 946 (2022)
Revenue Service, Tax Forms and Publications, 1111 Constitution Ave. NW, IR-6526, Washington, DC 20224.
Although we can’t respond individually to each comment received, we do appreciate your feedback and will
consider your comments and suggestions as we revise
our tax forms, instructions, and publications. Don’t send
tax questions, tax returns, or payments to the above address.
Getting answers to your tax questions. If you have
a tax question not answered by this publication or the How
To Get Tax Help section at the end of this publication, go
to the IRS Interactive Tax Assistant page at IRS.gov/
Help/ITA where you can find topics by using the search
feature or viewing the categories listed.
Getting tax forms, instructions, and publications.
Go to IRS.gov/Forms to download current and prior-year
forms, instructions, and publications.
Ordering tax forms, instructions, and publications.
Go to IRS.gov/OrderForms to order current forms, instructions, and publications; call 800-829-3676 to order
prior-year forms and instructions. The IRS will process
your order for forms and publications as soon as possible.
Don’t resubmit requests you’ve already sent us. You can
get forms and publications faster online.
1.
Overview of Depreciation
Introduction
Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. It is an allowance
for the wear and tear, deterioration, or obsolescence of
the property.
This chapter discusses the general rules for depreciating property and answers the following questions.
• What property can be depreciated?
• What property cannot be depreciated?
• When does depreciation begin and end?
• What method can you use to depreciate your property?
• What is the basis of your depreciable property?
• How do you treat repairs and improvements?
• Do you have to file Form 4562?
• How do you correct depreciation deductions?
Useful Items
You may want to see:
Publication
534 Depreciating Property Placed in Service Before
1987
534
535 Business Expenses
535
538 Accounting Periods and Methods
538
551 Basis of Assets
551
Form (and Instructions)
Sch C (Form 1040) Profit or Loss From Business
Sch C (Form 1040)
2106 Employee Business Expenses
2106
3115 Application for Change in Accounting Method
3115
4562 Depreciation and Amortization
4562
See chapter 6 for information about getting publications
and forms.
What Property Can Be
Depreciated?
Terms you may need to know
(see Glossary):
Adjusted basis
Basis
Commuting
Disposition
Fair market value (FMV)
Intangible property
Listed property
Placed in service
Tangible property
Term interest
Useful life
You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. You can also depreciate certain intangible property, such as patents, copyrights, and
computer software.
To be depreciable, the property must meet all the following requirements.
• It must be property you own.
• It must be used in your business or income-producing
activity.
• It must have a determinable useful life.
Chapter 1
Overview of Depreciation
Page 3
• It must be expected to last more than 1 year.
The following discussions provide information about these
requirements.
Property You Own
To claim depreciation, you must usually be the owner of
the property. You are considered as owning property even
if it is subject to a debt.
Example 1. You made a down payment to purchase
rental property and assumed the previous owner’s mortgage. You own the property and you can depreciate it.
Example 2. You bought a new van that you will use
only for your courier business. You will be making payments on the van over the next 5 years. You own the van
and you can depreciate it.
Leased property. You can depreciate leased property
only if you retain the incidents of ownership in the property
(explained below). This means you bear the burden of exhaustion of the capital investment in the property. Therefore, if you lease property from someone to use in your
trade or business or for the production of income, generally you cannot depreciate its cost because you do not retain the incidents of ownership. You can, however, depreciate any capital improvements you make to the property.
See How Do You Treat Repairs and Improvements, later
in this chapter, and Additions and Improvements under
Which Recovery Period Applies? in chapter 4.
If you lease property to someone, you can generally
depreciate its cost even if the lessee (the person leasing
from you) has agreed to preserve, replace, renew, and
maintain the property. However, if the lease provides that
the lessee is to maintain the property and return to you the
same property or its equivalent in value at the expiration of
the lease in as good condition and value as when leased,
you cannot depreciate the cost of the property.
Incidents of ownership. Incidents of ownership in
property include the following.
• The legal title to the property.
• The legal obligation to pay for the property.
• The responsibility to pay maintenance and operating
expenses.
• The duty to pay any taxes on the property.
• The risk of loss if the property is destroyed, con-
demned, or diminished in value through obsolescence
or exhaustion.
Life tenant. Generally, if you hold business or investment
property as a life tenant, you can depreciate it as if you
were the absolute owner of the property. However, see
Certain term interests in property under Excepted Property, later.
Cooperative apartments. If you are a tenant-stockholder in a cooperative housing corporation and use your
cooperative apartment in your business or for the producPage 4
Chapter 1
Overview of Depreciation
tion of income, you can depreciate your stock in the corporation, even though the corporation owns the apartment.
Figure your depreciation deduction as follows.
1. Figure the depreciation for all the depreciable real
property owned by the corporation in which you have
a proprietary lease or right of tenancy. If you bought
your cooperative stock after its first offering, figure the
depreciable basis of this property as follows.
a. Multiply your cost per share by the total number of
outstanding shares, including any shares held by
the corporation.
b. Add to the amount figured in (a) any mortgage
debt on the property on the date you bought the
stock.
c. Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land.
2. Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be
rented but cannot be lived in by tenant-stockholders.
3. Divide the number of your shares of stock by the total
number of outstanding shares, including any shares
held by the corporation.
4. Multiply the result of (2) by the percentage you figured
in (3). This is your depreciation on the stock.
Your depreciation deduction for the year cannot be
more than the part of your adjusted basis in the stock of
the corporation that is allocable to your business or income-producing property. You must also reduce your depreciation deduction if only a portion of the property is
used in a business or for the production of income.
Example. You figure your share of the cooperative
housing corporation’s depreciation to be $30,000. Your
adjusted basis in the stock of the corporation is $50,000.
You use one-half of your apartment solely for business
purposes. Your depreciation deduction for the stock for
the year cannot be more than $25,000 (1/2 of $50,000).
Change to business use. If you change your cooperative apartment to business use, figure your allowable depreciation as explained earlier. The basis of all the depreciable real property owned by the cooperative housing
corporation is the smaller of the following amounts.
• The FMV of the property on the date you change your
apartment to business use. This is considered to be
the same as the corporation’s adjusted basis minus
straight line depreciation, unless this value is unrealistic.
• The corporation’s adjusted basis in the property on
that date. Do not subtract depreciation when figuring
the corporation’s adjusted basis.
If you bought the stock after its first offering, the corporation’s adjusted basis in the property is the amount figured in (1) above. The FMV of the property is considered
to be the same as the corporation’s adjusted basis figured
in this way minus straight line depreciation, unless the
value is unrealistic.
For a discussion of FMV and adjusted basis, see Pub.
551.
Property Used in Your Business or
Income-Producing Activity
To claim depreciation on property, you must use it in your
business or income-producing activity. If you use property
to produce income (investment use), the income must be
taxable. You cannot depreciate property that you use
solely for personal activities.
Partial business or investment use. If you use property for business or investment purposes and for personal
purposes, you can deduct depreciation based only on the
business or investment use. For example, you cannot deduct depreciation on a car used only for commuting, personal shopping trips, family vacations, driving children to
and from school, or similar activities.
You must keep records showing the business, investment, and personal use of your property. For
RECORDS more information on the records you must keep
for listed property, such as a car, see What Records Must
Be Kept? in chapter 5.
Although you can combine business and investment use of property when figuring depreciation
CAUTION deductions, do not treat investment use as qualified business use when determining whether the business-use requirement for listed property is met. For information about qualified business use of listed property, see
What Is the Business-Use Requirement? in chapter 5.
!
Office in the home. If you use part of your home as
an office, you may be able to deduct depreciation on that
part based on its business use. For information about depreciating your home office, see Pub. 587.
Inventory. You cannot depreciate inventory because it is
not held for use in your business. Inventory is any property
you hold primarily for sale to customers in the ordinary
course of your business.
If you are a rent-to-own dealer, you may be able to treat
certain property held in your business as depreciable
property rather than as inventory. See Rent-to-own dealer
under Which Property Class Applies Under GDS? in
chapter 4.
In some cases, it is not clear whether property is held
for sale (inventory) or for use in your business. If it is unclear, examine carefully all the facts in the operation of the
particular business. The following example shows how a
careful examination of the facts in two similar situations results in different conclusions.
by similar arrangements in which a dealer’s profit is not intended or considered. Maple can depreciate the leased
cars because the cars are not held primarily for sale to
customers in the ordinary course of business, but are
leased.
If Maple buys cars at wholesale prices, leases them for
a short time, and then sells them at retail prices or in sales
in which a dealer’s profit is intended, the cars are treated
as inventory and are not depreciable property. In this situation, the cars are held primarily for sale to customers in
the ordinary course of business.
Containers. Generally, containers for the products
you sell are part of inventory and you cannot depreciate
them. However, you can depreciate containers used to
ship your products if they have a life longer than 1 year
and meet the following requirements.
• They qualify as property used in your business.
• Title to the containers does not pass to the buyer.
To determine if these requirements are met, consider
the following questions.
• Does your sales contract, sales invoice, or other type
of order acknowledgment indicate whether you have
retained title?
• Does your invoice treat the containers as separate
items?
• Do any of your records state your basis in the containers?
Property Having a Determinable
Useful Life
To be depreciable, your property must have a determinable useful life. This means that it must be something that
wears out, decays, gets used up, becomes obsolete, or
loses its value from natural causes.
Property Lasting More Than 1 Year
To be depreciable, property must have a useful life that
extends substantially beyond the year you place it in service.
Example. You maintain a library for use in your profession. You can depreciate it. However, if you buy technical
books, journals, or information services for use in your
business that have a useful life of 1 year or less, you cannot depreciate them. Instead, you deduct their cost as a
business expense.
Example. Maple Corporation is in the business of
leasing cars. At the end of their useful lives, when the cars
are no longer profitable to lease, Maple sells them. Maple
does not have a showroom, used car lot, or individuals to
sell the cars. Instead, it sells them through wholesalers or
Chapter 1
Overview of Depreciation
Page 5
What Property Cannot Be
Depreciated?
Terms you may need to know
(see Glossary):
basis of your improvements. See Uniform Capitalization Rules in Pub. 551.
• Section 197 intangibles. You must amortize these
costs. Section 197 intangibles are discussed in detail
in chapter 8 of Pub. 535. Intangible property, such as
certain computer software, that is not section 197 intangible property, can be depreciated if it meets certain requirements. See Intangible Property, later.
Amortization
• Certain term interests.
Basis
Certain term interests in property. You cannot depreciate a term interest in property created or acquired after
July 27, 1989, for any period during which the remainder
interest is held, directly or indirectly, by a person related to
you. A term interest in property means a life interest in
property, an interest in property for a term of years, or an
income interest in a trust.
Goodwill
Intangible property
Remainder interest
Term interest
Certain property cannot be depreciated. This includes
land and certain excepted property.
Land
You cannot depreciate the cost of land because land does
not wear out, become obsolete, or get used up. The cost
of land generally includes the cost of clearing, grading,
planting, and landscaping.
Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping
costs, incurred in preparing land for business use. These
costs must be so closely associated with other depreciable property that you can determine a life for them along
with the life of the associated property.
Example. You constructed a new building for use in
your business and paid for grading, clearing, seeding, and
planting bushes and trees. Some of the bushes and trees
were planted right next to the building, while others were
planted around the outer border of the lot. If you replace
the building, you would have to destroy the bushes and
trees right next to it. These bushes and trees are closely
associated with the building, so they have a determinable
useful life. Therefore, you can depreciate them. Add your
other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them.
Excepted Property
Even if the requirements explained in the preceding discussions are met, you cannot depreciate the following
property.
• Property placed in service and disposed of in the
same year. Determining when property is placed in
service is explained later.
• Equipment used to build capital improvements. You
must add otherwise allowable depreciation on the
equipment during the period of construction to the
Page 6
Chapter 1
Overview of Depreciation
Related persons. For a description of related persons, see Related Persons, later. For this purpose, however, treat as related persons only the relationships listed
in items (1) through (10) of that discussion and substitute
“50%” for “10%” each place it appears.
Basis adjustments. If you would be allowed a depreciation deduction for a term interest in property except that
the holder of the remainder interest is related to you, you
must generally reduce your basis in the term interest by
any depreciation or amortization not allowed.
If you hold the remainder interest, you must generally
increase your basis in that interest by the depreciation not
allowed to the term interest holder. However, do not increase your basis for depreciation not allowed for periods
during which either of the following situations applies.
• The term interest is held by an organization exempt
from tax.
• The term interest is held by a nonresident alien indi-
vidual or foreign corporation, and the income from the
term interest is not effectively connected with the conduct of a trade or business in the United States.
Exceptions. The above rules do not apply to the
holder of a term interest in property acquired by gift, bequest, or inheritance. They also do not apply to the holder
of dividend rights that were separated from any stripped
preferred stock if the rights were purchased after April 30,
1993, or to a person whose basis in the stock is determined by reference to the basis in the hands of the purchaser.
When Does Depreciation
Begin and End?
Terms you may need to know
(see Glossary):
Basis
Exchange
Placed in service
Idle Property
You begin to depreciate your property when you place it in
service for use in your trade or business or for the production of income. You stop depreciating property either
when you have fully recovered your cost or other basis or
when you retire it from service, whichever happens first.
Continue to claim a deduction for depreciation on property
used in your business or for the production of income
even if it is temporarily idle (not in use). For example, if
you stop using a machine because there is a temporary
lack of a market for a product made with that machine,
continue to deduct depreciation on the machine.
Placed in Service
Cost or Other Basis Fully Recovered
You place property in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Even if you are not using the property, it is
in service when it is ready and available for its specific
use.
You stop depreciating property when you have fully recovered your cost or other basis. You fully recover your basis
when your section 179 deduction, allowed or allowable
depreciation deductions, and salvage value, if applicable,
equal the cost or investment in the property. See What Is
the Basis of Your Depreciable Property, later.
Example 1. You bought a machine for your business.
The machine was delivered last year. However, it was not
installed and operational until this year. It is considered
placed in service this year. If the machine had been ready
and available for use when it was delivered, it would be
considered placed in service last year even if it was not
actually used until this year.
Retired From Service
Example 2. On April 6, Sue Thorn bought a house to
use as residential rental property. Sue made several repairs and had it ready for rent on July 5. At that time, Sue
began to advertise it for rent in the local newspaper. The
house is considered placed in service in July when it was
ready and available for rent. Sue can begin to depreciate
it in July.
Example 3. James Elm is a building contractor who
specializes in constructing office buildings. James bought
a truck last year that had to be modified to lift materials to
second-story levels. The installation of the lifting equipment was completed and James accepted delivery of the
modified truck on January 10 of this year. The truck was
placed in service on January 10, the date it was ready and
available to perform the function for which it was bought.
Conversion to business use. If you place property in
service in a personal activity, you cannot claim depreciation. However, if you change the property’s use to use in a
business or income-producing activity, then you can begin
to depreciate it at the time of the change. You place the
property in service in the business or income-producing
activity on the date of the change.
Example. You bought a home and used it as your personal home several years before you converted it to rental
property. Although its specific use was personal and no
depreciation was allowable, you placed the home in service when you began using it as your home. You can begin
to claim depreciation in the year you converted it to rental
property because its use changed to an income-producing use at that time.
You stop depreciating property when you retire it from
service, even if you have not fully recovered its cost or
other basis. You retire property from service when you
permanently withdraw it from use in a trade or business or
from use in the production of income because of any of
the following events.
• You sell or exchange the property.
• You convert the property to personal use.
• You abandon the property.
• You transfer the property to a supplies or scrap account.
• The property is destroyed.
If you included the property in a general asset account, see How Do You Use General Asset AcCAUTION counts? in chapter 4 for the rules that apply when
you dispose of that property.
!
What Method Can You Use To
Depreciate Your Property?
Terms you may need to know
(see Glossary):
Adjusted basis
Basis
Convention
Exchange
Fiduciary
Grantor
Intangible property
Nonresidential real property
Placed in service
Chapter 1
Overview of Depreciation
Page 7
Related persons
Residential rental property
Salvage value
Section 1245 property
Section 1250 property
Standard mileage rate
Straight line method
Unit-of-production method
Useful life
You must use the Modified Accelerated Cost Recovery
System (MACRS) to depreciate most property. MACRS is
discussed in chapter 4.
You cannot use MACRS to depreciate the following
property.
• Property you placed in service before 1987.
• Certain property owned or used in 1986.
• Intangible property.
• Films, videotapes, and recordings.
• Certain corporate or partnership property acquired in
a nontaxable transfer.
• Property you elected to exclude from MACRS.
The following discussions describe the property listed
above and explain what depreciation method should be
used.
Property You Placed in Service
Before 1987
You cannot use MACRS for property you placed in service before 1987 (except property you placed in service after July 31, 1986, if MACRS was elected). Property placed
in service before 1987 must be depreciated under the
methods discussed in Pub. 534.
For a discussion of when property is placed in service,
see When Does Depreciation Begin and End, earlier.
Use of real property changed. You must generally use
MACRS to depreciate real property that you acquired for
personal use before 1987 and changed to business or income-producing use after 1986.
Improvements made after 1986. You must treat an improvement made after 1986 to property you placed in
service before 1987 as separate depreciable property.
Therefore, you can depreciate that improvement as separate property under MACRS if it is the type of property that
otherwise qualifies for MACRS depreciation. For more information about improvements, see How Do You Treat
Repairs and Improvements, later, and Additions and Improvements under Which Recovery Period Applies? in
chapter 4.
Page 8
Chapter 1
Overview of Depreciation
Property Owned or Used in 1986
You may not be able to use MACRS for property you acquired and placed in service after 1986 if any of the situations described below apply. If you cannot use MACRS,
the property must be depreciated under the methods discussed in Pub. 534.
For the following discussions, do not treat property as owned before you placed it in service. If
CAUTION you owned property in 1986 but did not place it in
service until 1987, you do not treat it as owned in 1986.
!
Personal property. You cannot use MACRS for personal property (section 1245 property) in any of the following situations.
1. You or someone related to you owned or used the
property in 1986.
2. You acquired the property from a person who owned
it in 1986 and as part of the transaction the user of the
property did not change.
3. You lease the property to a person (or someone related to this person) who owned or used the property in
1986.
4. You acquired the property in a transaction in which:
a. The user of the property did not change, and
b. The property was not MACRS property in the
hands of the person from whom you acquired it
because of (2) or (3) above.
Real property. You generally cannot use MACRS for
real property (section 1250 property) in any of the following situations.
• You or someone related to you owned the property in
1986.
• You lease the property to a person who owned the
property in 1986 (or someone related to that person).
• You acquired the property in a like-kind exchange, in-
voluntary conversion, or repossession of property you
or someone related to you owned in 1986. MACRS
applies only to that part of your basis in the acquired
property that represents cash paid or unlike property
given up. It does not apply to the carried-over part of
the basis.
Exceptions. The rules above do not apply to the following.
1. Residential rental property or nonresidential real property.
2. Any property if, in the first tax year it is placed in service, the deduction under the Accelerated Cost Recovery System (ACRS) is more than the deduction under
MACRS using the half-year convention. For information on how to figure depreciation under ACRS, see
Pub. 534.
3. Property that was MACRS property in the hands of
the person from whom you acquired it because of (2)
above.
Related persons. For this purpose, the following are related persons.
1. An individual and a member of their family, including
only a spouse, child, parent, sibling, half sibling, ancestor, and lineal descendant.
2. A corporation and an individual who directly or indirectly owns more than 10% of the value of the outstanding stock of that corporation.
3. Two corporations that are members of the same controlled group.
4. A trust fiduciary and a corporation if more than 10% of
the value of the outstanding stock is directly or indirectly owned by or for the trust or grantor of the trust.
5. The grantor and fiduciary, and the fiduciary and beneficiary, of any trust.
6. The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the
same person is the grantor of both trusts.
7. A tax-exempt educational or charitable organization
and any person (or, if that person is an individual, a
member of that person’s family) who directly or indirectly controls the organization.
8. Two S corporations, and an S corporation and a regular corporation, if the same persons own more than
10% of the value of the outstanding stock of each corporation.
9. A corporation and a partnership if the same persons
own both of the following.
a. More than 10% of the value of the outstanding
stock of the corporation.
b. More than 10% of the capital or profits interest in
the partnership.
10. The executor and beneficiary of any estate.
11. A partnership and a person who directly or indirectly
owns more than 10% of the capital or profits interest
in the partnership.
12. Two partnerships, if the same persons directly or indirectly own more than 10% of the capital or profits interest in each.
13. The related person and a person who is engaged in
trades or businesses under common control. See
sections 52(a) and 52(b) of the Internal Revenue
Code.
When to determine relationship. You must determine whether you are related to another person at the
time you acquire the property.
A partnership acquiring property from a terminating
partnership must determine whether it is related to the terminating partnership immediately before the event
causing the termination.
Constructive ownership of stock or partnership interest. To determine whether a person directly or indirectly owns any of the outstanding stock of a corporation
or an interest in a partnership, apply the following rules.
1. Stock or a partnership interest directly or indirectly
owned by or for a corporation, partnership, estate, or
trust is considered owned proportionately by or for its
shareholders, partners, or beneficiaries. However, for
a partnership interest owned by or for a C corporation,
this applies only to shareholders who directly or indirectly own 5% or more of the value of the stock of the
corporation.
2. An individual is considered to own the stock or partnership interest directly or indirectly owned by or for
the individual’s family.
3. An individual who owns, except by applying rule (2),
any stock in a corporation is considered to own the
stock directly or indirectly owned by or for the individual’s partner.
4. For purposes of rule (1), (2), or (3), stock or a partnership interest considered to be owned by a person under rule (1) is treated as actually owned by that person. However, stock or a partnership interest
considered to be owned by an individual under rule
(2) or (3) is not treated as owned by that individual for
reapplying either rule (2) or (3) to make another person considered to be the owner of the same stock or
partnership interest.
Intangible Property
Generally, if you can depreciate intangible property, you
usually use the straight line method of depreciation. However, you can choose to depreciate certain intangible
property under the income forecast method (discussed
later).
You cannot depreciate intangible property that is
a section 197 intangible or that does not otherCAUTION wise meet all the requirements discussed earlier
under What Property Can Be Depreciated.
!
Straight Line Method
This method lets you deduct the same amount of depreciation each year over the useful life of the property. To figure your deduction, first determine the adjusted basis, salvage value, and estimated useful life of your property.
Subtract the salvage value, if any, from the adjusted basis. The balance is the total depreciation you can take
over the useful life of the property.
Divide the balance by the number of years in the useful
life. This gives you your yearly depreciation deduction.
Unless there is a big change in adjusted basis or useful
life, this amount will stay the same throughout the time
you depreciate the property. If, in the first year, you use
the property for less than a full year, you must prorate your
depreciation deduction for the number of months in use.
Chapter 1
Overview of Depreciation
Page 9
Example. In April, you bought a patent for $5,100 that
is not a section 197 intangible. You depreciate the patent
under the straight line method, using a 17-year useful life
and no salvage value. You divide the $5,100 basis by 17
years to get your $300 yearly depreciation deduction. You
only used the patent for 9 months during the first year, so
you multiply $300 by 9/12 to get your deduction of $225 for
the first year. Next year, you can deduct $300 for the full
year.
Patents and copyrights. If you can depreciate the cost
of a patent or copyright, use the straight line method over
the useful life. The useful life of a patent or copyright is the
lesser of the life granted to it by the government or the remaining life when you acquire it. However, if the patent or
copyright becomes valueless before the end of its useful
life, you can deduct in that year any of its remaining cost
or other basis.
Computer software. Computer software is generally a
section 197 intangible and cannot be depreciated if you
acquired it in connection with the acquisition of assets
constituting a business or a substantial part of a business.
However, computer software is not a section 197 intangible and can be depreciated, even if acquired in connection with the acquisition of a business, if it meets all of the
following tests.
• It is readily available for purchase by the general public.
• It is subject to a nonexclusive license.
• It has not been substantially modified.
If the software meets the tests above, it may also qualify for the section 179 deduction and the special depreciation allowance, discussed later in chapters 2 and 3. If you
can depreciate the cost of computer software, use the
straight line method over a useful life of 36 months.
Tax-exempt use property subject to a lease. The
useful life of computer software leased under a lease
agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or
entity (other than a partnership), cannot be less than
125% of the lease term.
Certain created intangibles. You can amortize certain
intangibles created on or after December 31, 2003, over a
15-year period using the straight line method and no salvage value, even though they have a useful life that cannot be estimated with reasonable accuracy. For example,
amounts paid to acquire memberships or privileges of indefinite duration, such as a trade association membership, are eligible costs.
The following are not eligible.
• Any intangible asset acquired from another person.
• Created financial interests.
• Any intangible asset that has a useful life that can be
estimated with reasonable accuracy.
• Any intangible asset that has an amortization period or
limited useful life that is specifically prescribed or
Page 10
Chapter 1
Overview of Depreciation
prohibited by the Code, regulations, or other published IRS guidance.
• Any amount paid to facilitate an acquisition of a trade
or business, a change in the capital structure of a
business entity, and certain other transactions.
You must also increase the 15-year safe harbor amortization period to a 25-year period for certain intangibles related to benefits arising from the provision, production, or
improvement of real property. For this purpose, real property includes property that will remain attached to the real
property for an indefinite period of time, such as roads,
bridges, tunnels, pavements, and pollution control facilities.
Income Forecast Method
You can choose to use the income forecast method instead of the straight line method to depreciate the following depreciable intangibles.
• Motion picture films or videotapes.
• Sound recordings.
• Copyrights.
• Books.
• Patents.
Under the income forecast method, each year’s depreciation deduction is equal to the cost of the property, multiplied by a fraction. The numerator of the fraction is the
current year’s net income from the property, and the denominator is the total income anticipated from the property
through the end of the 10th tax year following the tax year
the property is placed in service. For more information,
see section 167(g) of the Internal Revenue Code.
Films, videotapes, and recordings. You cannot use
MACRS for motion picture films, videotapes, and sound
recordings. For this purpose, sound recordings are discs,
tapes, or other phonorecordings resulting from the fixation
of a series of sounds. You can depreciate this property using either the straight line method or the income forecast
method.
Participations and residuals. You can include participations and residuals in the adjusted basis of the property
for purposes of computing your depreciation deduction
under the income forecast method. The participations and
residuals must relate to income to be derived from the
property before the end of the 10th tax year after the property is placed in service. For this purpose, participations
and residuals are defined as costs, which by contract vary
with the amount of income earned in connection with the
property.
Instead of including these amounts in the adjusted basis of the property, you can deduct the costs in the tax
year that they are paid.
Videocassettes. If you are in the business of renting
videocassettes, you can depreciate only those videocassettes bought for rental. If the videocassette has a useful
life of 1 year or less, you can currently deduct the cost as
a business expense.
Corporate or Partnership Property
Acquired in a Nontaxable Transfer
What Is the Basis of Your
Depreciable Property?
MACRS does not apply to property used before 1987 and
transferred after 1986 to a corporation or partnership (except property the transferor placed in service after July 31,
1986, if MACRS was elected) to the extent its basis is carried over from the property’s adjusted basis in the transferor’s hands. You must continue to use the same depreciation method as the transferor and figure depreciation
as if the transfer had not occurred. However, if MACRS
would otherwise apply, you can use it to depreciate the
part of the property’s basis that exceeds the carried-over
basis.
Terms you may need to know
(see Glossary):
The nontaxable transfers covered by this rule include
the following.
To figure your depreciation deduction, you must determine the basis of your property. To determine basis, you
need to know the cost or other basis of your property.
• A distribution in complete liquidation of a subsidiary.
• A transfer to a corporation controlled by the transferor.
• An exchange of property solely for corporate stock or
securities in a reorganization.
• A contribution of property to a partnership in exchange
for a partnership interest.
• A partnership distribution of property to a partner.
Election To Exclude Property
From MACRS
If you can properly depreciate any property under a
method not based on a term of years, such as the
unit-of-production method, you can elect to exclude that
property from MACRS. You make the election by reporting your depreciation for the property on line 15 in Part II
of Form 4562 and attaching a statement as described in
the Instructions for Form 4562. You must make this election by the return due date (including extensions) for the
tax year you place your property in service. However, if
you timely filed your return for the year without making the
election, you can still make the election by filing an amended return within 6 months of the due date of the return
(excluding extensions). Attach the election to the amended return and write “Filed pursuant to section
301.9100-2” on the election statement. File the amended
return at the same address you filed the original return.
Use of standard mileage rate. If you use the standard
mileage rate to figure your tax deduction for your business
automobile, you are treated as having made an election to
exclude the automobile from MACRS. See Pub. 463 for a
discussion of the standard mileage rate.
Abstract fees
Adjusted basis
Basis
Exchange
Fair market value (FMV)
Cost as Basis
The basis of property you buy is its cost plus amounts you
paid for items such as sales tax (see Exception below),
freight charges, and installation and testing fees. The cost
includes the amount you pay in cash, debt obligations,
other property, or services.
Exception. You can elect to deduct state and local
general sales taxes instead of state and local income
taxes as an itemized deduction on Schedule A (Form
1040). If you make that choice, you cannot include those
sales taxes as part of your cost basis.
Assumed debt. If you buy property and assume (or buy
subject to) an existing mortgage or other debt on the property, your basis includes the amount you pay for the property plus the amount of the assumed debt.
Example. You make a $20,000 down payment on
property and assume the seller’s mortgage of $120,000.
Your total cost is $140,000, the cash you paid plus the
mortgage you assumed.
Settlement costs. The basis of real property also includes certain fees and charges you pay in addition to the
purchase price. These are generally shown on your settlement statement and include the following.
• Legal and recording fees.
• Abstract fees.
• Survey charges.
• Owner’s title insurance.
• Amounts the seller owes that you agree to pay, such
as back taxes or interest, recording or mortgage fees,
charges for improvements or repairs, and sales commissions.
For fees and charges you cannot include in the basis of
property, see Real Property in Pub. 551.
Chapter 1
Overview of Depreciation
Page 11
Property you construct or build. If you construct, build,
or otherwise produce property for use in your business,
you may have to use the uniform capitalization rules to determine the basis of your property. For information about
the uniform capitalization rules, see Pub. 551 and the regulations under section 263A of the Internal Revenue
Code.
Other Basis
Other basis usually refers to basis that is determined by
the way you received the property. For example, your basis is other than cost if you acquired the property in exchange for other property, as payment for services you
performed, as a gift, or as an inheritance. If you acquired
property in this or some other way, see Pub. 551 to determine your basis.
Property changed from personal use. If you held property for personal use and later use it in your business or
income-producing activity, your depreciable basis is the
lesser of the following.
1. The FMV of the property on the date of the change in
use.
2. Your original cost or other basis adjusted as follows.
a. Increased by the cost of any permanent improvements or additions and other costs that must be
added to basis.
b. Decreased by any deductions you claimed for
casualty and theft losses and other items that reduced your basis.
Example. Several years ago, Nia paid $160,000 to
have a home built on a lot that cost $25,000. Before
changing the property to rental use last year, Nia paid
$20,000 for permanent improvements to the house and
claimed a $2,000 casualty loss deduction for damage to
the house. Land is not depreciable, so Nia includes only
the cost of the house when figuring the basis for depreciation.
The adjusted basis in the house when Nia changed its
use was $178,000 ($160,000 + $20,000 − $2,000). On the
same date, the property had an FMV of $180,000, of
which $15,000 was for the land and $165,000 was for the
house. The basis for depreciation on the house is the
FMV on the date of change ($165,000) because it is less
than Nia’s adjusted basis ($178,000).
Property acquired in a nontaxable transaction. Generally, if you receive property in a nontaxable exchange,
the basis of the property you receive is the same as the
adjusted basis of the property you gave up. Special rules
apply in determining the basis and figuring the MACRS
depreciation deduction and special depreciation allowance for property acquired in a like-kind exchange or involuntary conversion. See Like-kind exchanges and involuntary conversions under How Much Can You Deduct? in
chapter 3, and Figuring the Deduction for Property Acquired in a Nontaxable Exchange in chapter 4.
Page 12
Chapter 1
Overview of Depreciation
There are also special rules for determining the basis of
MACRS property involved in a like-kind exchange or involuntary conversion when the property is contained in a
general asset account. See How Do You Use General Asset Accounts? in chapter 4.
Adjusted Basis
To find your property’s basis for depreciation, you may
have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you
placed it in service. These events could include the following.
• Installing utility lines.
• Paying legal fees for perfecting the title.
• Settling zoning issues.
• Receiving rebates.
• Incurring a casualty or theft loss.
For a discussion of adjustments to the basis of your property, see Adjusted Basis in Pub. 551.
If you depreciate your property under MACRS, you may
also have to reduce your basis by certain deductions and
credits with respect to the property. For more information,
see What Is the Basis for Depreciation? in chapter 4.
Basis adjustment for depreciation allowed or allowable. You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. Depreciation allowed is depreciation you actually deducted
(from which you received a tax benefit). Depreciation allowable is depreciation you are entitled to deduct.
If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the
full amount of depreciation allowable.
If you deduct more depreciation than you should, you
must reduce your basis by any amount deducted from
which you received a tax benefit (the depreciation allowed).
How Do You Treat Repairs and
Improvements?
If you improve depreciable property, you must treat the
improvement as separate depreciable property. Improvement means an addition to or partial replacement of property that is a betterment to the property, restores the property, or adapts it to a new or different use. See section
1.263(a)-3 of the regulations.
You generally deduct the cost of repairing business
property in the same way as any other business expense.
However, if the cost is for a betterment to the property, to
restore the property, or to adapt the property to a new or
different use, you must treat it as an improvement and depreciate it.
Example. You repair a small section on one corner of
the roof of a rental house. You deduct the cost of the repair as a rental expense. However, if you completely replace the roof, the new roof is an improvement because it
is a restoration of the building. You depreciate the cost of
the new roof.
Improvements to rented property. You can depreciate
permanent improvements you make to business property
you rent from someone else.
Do You Have To File
Form 4562?
Terms you may need to know
(see Glossary):
Amortization
Listed property
Placed in service
Standard mileage rate
Use Form 4562 to figure your deduction for depreciation
and amortization. Attach Form 4562 to your tax return for
the current tax year if you are claiming any of the following
items.
• A section 179 deduction for the current year or a sec-
tion 179 carryover from a prior year. See chapter 2 for
information on the section 179 deduction.
• Depreciation for property placed in service during the
current year.
• Depreciation on any vehicle or other listed property,
regardless of when it was placed in service. See
chapter 5 for information on listed property.
• A deduction for any vehicle if the deduction is reported
on a form other than Schedule C (Form 1040).
How Do You Correct
Depreciation Deductions?
If you deducted an incorrect amount of depreciation in any
year, you may be able to make a correction by filing an
amended return for that year. See Filing an Amended Return next. If you are not allowed to make the correction on
an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. See Changing Your Accounting Method, later.
Filing an Amended Return
You can file an amended return to correct the amount of
depreciation claimed for any property in any of the following situations.
• You claimed the incorrect amount because of a mathematical error made in any year.
• You claimed the incorrect amount because of a posting error made in any year.
• You have not adopted a method of accounting for
property placed in service by you in tax years ending
after December 29, 2003.
• You claimed the incorrect amount on property placed
in service by you in tax years ending before December
30, 2003.
Adoption of accounting method defined. Generally,
you adopt a method of accounting for depreciation by using a permissible method of determining depreciation
when you file your first tax return, or by using the same impermissible method of determining depreciation in two or
more consecutively filed tax returns.
For an exception to the 2-year rule, see sections
6.01(1)(b), 6.19(1)(b), and 6.21(3)(b) of Revenue Procedure 2022-14 on page 502 of Internal Revenue Bulletin
2022-7, available at IRS.gov/irb/2022-7_IRB#REVPROC-2022-14.
• Amortization of costs if the current year is the first year
When to file. If an amended return is allowed, you must
file it by the later of the following.
• Depreciation or amortization on any asset on a corpo-
• 3 years from the date you filed your original return for
of the amortization period.
rate income tax return (other than Form 1120-S, U.S.
Income Tax Return for an S Corporation) regardless
of when it was placed in service.
You must submit a separate Form 4562 for each
business or activity on your return for which a
CAUTION Form 4562 is required.
!
Table 1-1 presents an overview of the purpose of the
various parts of Form 4562.
Employee. Do not use Form 4562 if you are an employee and you deduct job-related vehicle expenses using
either actual expenses (including depreciation) or the
standard mileage rate. Instead, use Form 2106.
the year in which you did not deduct the correct
amount. A return filed before an unextended due date
is considered filed on that due date.
• 2 years from the time you paid your tax for that year.
Changing Your Accounting Method
Generally, you must get IRS approval to change your
method of accounting. You must generally file Form 3115,
Application for Change in Accounting Method, to request
a change in your method of accounting for depreciation.
Chapter 1
Overview of Depreciation
Page 13
The following are examples of a change in method of
accounting for depreciation.
scope limitations and automatic accounting method
changes.
• A change from an impermissible method of determin-
Additional guidance. For additional guidance and
special procedures for changing your accounting method,
automatic change procedures, amending your return, and
filing Form 3115, see Revenue Procedure 2015-13 on
page 419 of Internal Revenue Bulletin 2015-5, available at
IRS.gov/irb/2015-05_IRB#RP-2015-13; Revenue Procedure 2019-43 on page 1107 of Internal Revenue Bulletin
2019-48, available at IRS.gov/irb/2019-48_IRB#REVPROC-2019-43; and Revenue Procedure 2022-14 on
page 502 of Internal Revenue Bulletin 2022-7, available at
IRS.gov/irb/2022-7_IRB#REV-PROC-2022-14.
ing depreciation for depreciable property if the impermissible method was used in two or more consecutively filed tax returns.
• A change in the treatment of an asset from nondepreciable to depreciable or vice versa.
• A change in the depreciation method, period of recovery, or convention of a depreciable asset.
• A change from not claiming to claiming the special depreciation allowance if you did not make the election
to not claim any special allowance.
• A change from claiming a 50% special depreciation allowance to claiming a 100% special depreciation allowance for qualified property acquired and placed in
service by you after September 27, 2017 (if you did
not make the election under section 168(k)(10) to
claim a 50% special depreciation allowance).
Changes in depreciation that are not a change in
method of accounting (and may only be made on an
amended return) include the following.
• An adjustment in the useful life of a depreciable asset
for which depreciation is determined under section
167.
• A change in use of an asset in the hands of the same
taxpayer.
• Making a late depreciation election or revoking a
timely valid depreciation election (including the election not to deduct the special depreciation allowance).
If you elected not to claim any special depreciation allowance, a change from not claiming to claiming the
special depreciation allowance is a revocation of the
election and is not an accounting method change.
Generally, you must get IRS approval to make a late
depreciation election or revoke a depreciation election. You must submit a request for a letter ruling to
make a late election or revoke an election.
Section 481(a) adjustment. If you file Form 3115 and
change from an impermissible method to a permissible
method of accounting for depreciation, you can make a
section 481(a) adjustment for any unclaimed or excess
amount of allowable depreciation. The adjustment is the
difference between the total depreciation actually deducted for the property and the total amount allowable prior to
the year of change. If no depreciation was deducted, the
adjustment is the total depreciation allowable prior to the
year of change. A negative section 481(a) adjustment results in a decrease in taxable income. It is taken into account in the year of change and is reported on your business tax returns as “other expenses.” A positive section
481(a) adjustment results in an increase in taxable income. It is generally taken into account over 4 tax years
and is reported on your business tax returns as “other income.” However, you can elect to use a 1-year adjustment
period and report the adjustment in the year of change if
the total adjustment is less than $50,000. Make the election by completing the appropriate line on Form 3115.
If you file a Form 3115 and change from one permissible method to another permissible method, the section
481(a) adjustment is zero.
• Any change in the placed in service date of a depreci-
2.
See sections 1.446-1(e)(2)(ii)(d) and 1.446-1(e)(2)(iii)
of the regulations for more information and examples.
Electing the Section 179
Deduction
able asset.
IRS approval. If your change in method of accounting for
depreciation is described in Revenue Procedure 2019-43,
on page 1107 of Internal Revenue Bulletin 2019-48, as
modified, amplified, and superseded by Revenue Procedure 2022-14, on page 502 of Internal Revenue Bulletin
2022-7, you may be able to get approval from the IRS to
make that change under the automatic change request
procedures generally covered in Revenue Procedure
2015-13 on page 419 of Internal Revenue Bulletin 2015-5.
If you do not qualify to use the automatic procedures to
get approval, you must use the advance consent request
procedures generally covered in Revenue Procedure
2015-13. Also, see the Instructions for Form 3115 for
more information on getting approval, including lists of
Page 14
Chapter 2
Introduction
You can elect to recover all or part of the cost of certain
qualifying property, up to a limit, by deducting it in the year
you place the property in service. This is the section 179
deduction. You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions.
Electing the Section 179 Deduction
Table 1-1. Purpose of Form 4562
This table describes the purpose of the various parts of Form 4562. For more information, see Form 4562
and its instructions.
Part
!
Purpose
I
• Electing the section 179 deduction
• Figuring the maximum section 179 deduction for the current year
• Figuring any section 179 deduction carryover to the next year
II
• Reporting the special depreciation allowance for property (other than listed property) placed in
service during the tax year
• Reporting depreciation deductions on property being depreciated under any method other than
MACRS
III
• Reporting MACRS depreciation deductions for property placed in service before this year
• Reporting MACRS depreciation deductions for property (other than listed property) placed in
service during the current year
IV
• Summarizing other parts
V
• Reporting the special depreciation allowance for automobiles and other listed property
• Reporting MACRS depreciation on automobiles and other listed property
• Reporting the section 179 cost elected for automobiles and other listed property
• Reporting information on the use of automobiles and other transportation vehicles
VI
• Reporting amortization deductions
Estates and trusts cannot elect the section 179
deduction.
Tangible property
CAUTION
This chapter explains what property does and does not
qualify for the section 179 deduction, what limits apply to
the deduction (including special rules for partnerships and
corporations), and how to elect it. It also explains when
and how to recapture the deduction.
Useful Items
You may want to see:
To qualify for the section 179 deduction, your property
must meet all the following requirements.
• It must be eligible property.
• It must be acquired for business use.
• It must have been acquired by purchase.
• It must not be property described later under What
Property Does Not Qualify.
Publication
The following discussions provide information about
these requirements and exceptions.
537 Installment Sales
537
544 Sales and Other Dispositions of Assets
Eligible Property
544
Form (and Instructions)
To qualify for the section 179 deduction, your property
must be one of the following types of depreciable property.
4562 Depreciation and Amortization
4562
4797 Sales of Business Property
4797
See chapter 6 for information about getting publications
and forms.
1. Tangible personal property.
2. Other tangible property (except buildings and their
structural components) used as:
a. An integral part of manufacturing, production, or
extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services;
What Property Qualifies?
Terms you may need to know
(see Glossary):
b. A research facility used in connection with any of
the activities in (a) above; or
Adjusted basis
c. A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities.
Basis
Class life
Structural components
Chapter 2
Electing the Section 179 Deduction
Page 15
3. Single-purpose agricultural (livestock) or horticultural
structures. See chapter 7 of Pub. 225 for definitions
and information regarding the use requirements that
apply to these structures.
4. Storage facilities (except buildings and their structural
components) used in connection with distributing petroleum or any primary product of petroleum.
5. Off-the-shelf computer software.
6. Qualified section 179 real property (described below).
Tangible personal property. Tangible personal property is any tangible property that is not real property. It includes the following property.
• Machinery and equipment.
• Property contained in or attached to a building (other
1. Roofs.
2. Heating, ventilation, and air-conditioning property.
3. Fire protection and alarm systems.
4. Security systems.
For more information, see Special rules for qualified section 179 real property, later.
Qualified improvement property. Generally, this is
any improvement to an interior portion of a building that is
nonresidential real property if the improvement is placed
in service after the date the building was first placed in
service.
Also, qualified improvement property does not include
the cost of any improvement attributable to the following.
than structural components), such as refrigerators,
grocery store counters, office equipment, printing
presses, testing equipment, and signs.
• The enlargement of the building.
• Any elevator or escalator.
• The internal structural framework of the building.
• Gasoline storage tanks and pumps at retail service
Property Acquired for Business Use
• Livestock, including horses, cattle, hogs, sheep,
• Certain property used predominantly to furnish lodg-
To qualify for the section 179 deduction, your property
must have been acquired for use in your trade or business. Property you acquire only for the production of income, such as investment property, rental property (if
renting property is not your trade or business), and property that produces royalties, does not qualify.
The treatment of property as tangible personal property
for the section 179 deduction is not controlled by its treatment under local law. For example, property may not be
tangible personal property for the deduction even if treated so under local law, and some property (such as fixtures) may be tangible personal property for the deduction
even if treated as real property under local law.
Partial business use. When you use property for both
business and nonbusiness purposes, you can elect the
section 179 deduction only if you use the property more
than 50% for business in the year you place it in service. If
you use the property more than 50% for business, multiply
the cost of the property by the percentage of business
use. Use the resulting business cost to figure your section
179 deduction.
stations.
goats, and mink and other furbearing animals.
• Portable air conditioners or heaters placed in service
by you in tax years beginning after 2015.
ing or in connection with the furnishing of lodging (except as provided in section 50(b)(2)).
Off-the-shelf computer software. Off-the-shelf computer software is qualifying property for purposes of the
section 179 deduction. This is computer software that is
readily available for purchase by the general public, is
subject to a nonexclusive license, and has not been substantially modified. It includes any program designed to
cause a computer to perform a desired function. However,
a database or similar item is not considered computer
software unless it is in the public domain and is incidental
to the operation of otherwise qualifying software.
Qualified section 179 real property. You can elect to
treat certain qualified real property you placed in service
during the tax year as section 179 property. If this election
is made, the term “section 179 property” will include any
qualified real property that is:
• Qualified improvement property as described in section 168(e)(6) of the Internal Revenue Code, and
• Any of the following improvements to nonresidential
Example. May Oak bought and placed in service an
item of section 179 property costing $11,000. May used
the property 80% for business and 20% for personal purposes. The business part of the cost of the property is
$8,800 (80% (0.80) × $11,000).
Property Acquired by Purchase
To qualify for the section 179 deduction, your property
must have been acquired by purchase. For example,
property acquired by gift or inheritance does not qualify.
Property is not considered acquired by purchase in the
following situations.
1. It is acquired by one component member of a controlled group from another component member of the
same group.
2. Its basis is determined either:
real property placed in service after the date the nonresidential real property was first placed in service.
Page 16
Chapter 2
Electing the Section 179 Deduction
a. In whole or in part by its adjusted basis in the
hands of the person from whom it was acquired,
or
b. Under the stepped-up basis rules for property acquired from a decedent.
3. It is acquired from a related person.
Related persons. Related persons are described under
Related persons, earlier. However, to determine whether
property qualifies for the section 179 deduction, treat as
an individual’s family only their spouse, ancestors, and lineal descendants and substitute “50%” for “10%” each
place it appears.
Leased property. Generally, you cannot claim a section
179 deduction based on the cost of property you lease to
someone else. This rule does not apply to corporations.
However, you can claim a section 179 deduction for the
cost of the following property.
1. Property you manufacture or produce and lease to
others.
2. Property you purchase and lease to others if both the
following tests are met.
a. The term of the lease (including options to renew)
is less than 50% of the property’s class life.
Example. You are a tailor. You bought two industrial
sewing machines from your father. You placed both machines in service in the same year you bought them. They
do not qualify as section 179 property because you and
your father are related persons. You cannot claim a section 179 deduction for the cost of these machines.
What Property Does Not
Qualify?
How Much Can You Deduct?
Terms you may need to know
(see Glossary):
Terms you may need to know
(see Glossary):
Adjusted basis
Basis
Basis
Class life
Placed in service
Certain property does not qualify for the section 179 deduction. This includes the following.
Land and Improvements
Land and land improvements do not qualify as section
179 property. Land improvements include swimming
pools, paved parking areas, wharves, docks, bridges, and
fences.
Excepted Property
Even if the requirements explained earlier under What
Property Qualifies? are met, you cannot elect the section
179 deduction for the following property.
• Certain property you lease to others (if you are a noncorporate lessor).
• Property used predominantly outside the United
States, except property described in section 168(g)(4)
of the Internal Revenue Code.
• Property used by certain tax-exempt organizations,
except property used in connection with the production of income subject to the tax on unrelated trade or
business income.
• Property used by governmental units or foreign per-
sons or entities, except property used under a lease
with a term of less than 6 months.
b. For the first 12 months after the property is transferred to the lessee, the total business deductions
you are allowed on the property (other than rents
and reimbursed amounts) are more than 15% of
the rental income from the property.
Your section 179 deduction is generally the cost of the
qualifying property. However, the total amount you can
elect to deduct under section 179 is subject to a dollar
limit and a business income limit. These limits apply to
each taxpayer, not to each business. However, see Married Individuals under Dollar Limits, later. For a passenger
automobile, the total section 179 deduction and depreciation deduction are limited. See Do the Passenger Automobile Limits Apply? in chapter 5.
If you deduct only part of the cost of qualifying property
as a section 179 deduction, you can generally depreciate
the cost you do not deduct.
Trade-in of other property. If you buy qualifying property with cash and a trade-in, its cost for purposes of the
section 179 deduction includes only the cash you paid.
Example. Silver Leaf, a retail bakery, traded in two
ovens having a total adjusted basis of $680, for a new
oven costing $1,320. They received an $800 trade-in allowance for the old ovens and paid $520 in cash for the
new oven. On the date that Silver Leaf traded in the two
old ovens for the new oven, the old ovens and the new
oven are classified as real property under the law of the
state in which the old and new ovens are located and, as
a result, the old and new ovens are real property for purposes of section 1031. The new oven is section 179 property.
Chapter 2
Electing the Section 179 Deduction
Page 17
Only the portion of the new oven’s basis paid by cash
qualifies for the section 179 deduction. Therefore, Silver
Leaf’s qualifying cost for the section 179 deduction is
$520.
Dollar Limits
The total amount you can elect to deduct under section
179 for most property placed in service in tax years beginning in 2022 generally cannot be more than $1,080,000. If
you acquire and place in service more than one item of
qualifying property during the year, you can allocate the
section 179 deduction among the items in any way, as
long as the total deduction is not more than $1,080,000.
You do not have to claim the full $1,080,000.
The amount you can elect to deduct is not affecTIP ted if you place qualifying property in service in a
short tax year or if you place qualifying property in
service for only a part of a 12-month tax year.
After you apply the dollar limit to determine a tentative deduction, you must apply the business inCAUTION come limit (described later) to determine your actual section 179 deduction.
Sport Utility and Certain Other Vehicles
You cannot elect to expense more than $27,000 of the
cost of any heavy sport utility vehicle (SUV) and certain
other vehicles placed in service in tax years beginning in
2022. This rule applies to any 4-wheeled vehicle primarily
designed or used to carry passengers over public streets,
roads, or highways that is rated at more than 6,000
pounds gross vehicle weight and not more than 14,000
pounds gross vehicle weight. However, the $27,000 limit
does not apply to any vehicle:
• Designed to seat more than nine passengers behind
the driver’s seat;
• Equipped with a cargo area (either open or enclosed
by a cap) of at least 6 feet in interior length that is not
readily accessible from the passenger compartment;
or
• That has an integral enclosure fully enclosing the
driver compartment and load carrying device, does
not have seating rearward of the driver’s seat, and has
no body section protruding more than 30 inches
ahead of the leading edge of the windshield.
!
Example. In 2022, you bought and placed in service
$1,080,000 in machinery and a $25,000 circular saw for
your business. You elect to deduct $1,055,000 for the machinery and the entire $25,000 for the saw, a total of
$1,080,000. This is the maximum amount you can deduct.
Your $25,000 deduction for the saw completely recovered
its cost. Your basis for depreciation is zero. The basis for
depreciation of your machinery is $25,000. You figure this
by subtracting your $1,055,000 section 179 deduction for
the machinery from the $1,080,000 cost of the machinery.
Situations affecting dollar limit. Under certain circumstances, the general dollar limits on the section 179 deduction may be reduced or increased or there may be additional dollar limits. The general dollar limit is affected by
any of the following situations.
• The cost of your section 179 property placed in service exceeds $2,700,000.
• You placed in service a sport utility or certain other vehicles.
• You are married filing a joint or separate return.
Costs Exceeding $2,700,000
If the cost of your qualifying section 179 property placed in
service in a year is more than $2,700,000, you must generally reduce the dollar limit (but not below zero) by the
amount of cost over $2,700,000. If the cost of your section
179 property placed in service during 2022 is $3,780,000
or more, you cannot take a section 179 deduction.
Example. In 2022, Jane Ash placed in service machinery costing $2,750,000. This cost is $50,000 more than
$2,700,000, so Jane must reduce the dollar limit to
$1,030,000 ($1,080,000 − $50,000).
Page 18
Chapter 2
Married Individuals
If you are married, how you figure your section 179 deduction depends on whether you file jointly or separately. If
you file a joint return, you and your spouse are treated as
one taxpayer in determining any reduction to the dollar
limit, regardless of which of you purchased the property or
placed it in service. If you and your spouse file separate
returns, you are treated as one taxpayer for the dollar
limit, including the reduction for costs over $2,700,000.
You must allocate the dollar limit (after any reduction) between you equally, unless you both elect a different allocation. If the percentages elected by each of you do not
total 100%, 50% will be allocated to each of you.
Example. You are married. You and your spouse file
separate returns. You bought and placed in service
$2,700,000 of qualified farm machinery in 2022. Your
spouse has a separate business, and bought and placed
in service $300,000 of qualified business equipment. Your
combined dollar limit is $780,000. This is because you
and your spouse must figure the limit as if you were one
taxpayer. You reduce the $1,080,000 dollar limit by the
$300,000 excess of your costs over $2,700,000.
You elect to allocate the $780,000 dollar limit as follows.
• $741,000 ($780,000 x 95% (0.95)) to your machinery.
• $39,000 ($780,000 x 5% (0.05)) to your spouse’s
equipment.
If you did not make an election to allocate your costs in
this way, you and your spouse would have to allocate
$390,000 ($780,000 × 50% (0.50)) to each of you.
Joint return after filing separate returns. If you and
your spouse elect to amend your separate returns by filing
a joint return after the due date for filing your return, the
Electing the Section 179 Deduction
dollar limit on the joint return is the lesser of the following
amounts.
• The dollar limit (after reduction for any cost of section
179 property over $2,700,000).
You may have to figure the limit for this other deduction
taking into account the section 179 deduction. If so, complete the following steps.
Step
Action
1
Figure taxable income without the section 179
deduction or the other deduction.
2
Figure a hypothetical section 179 deduction
using the taxable income figured in Step 1.
3
Subtract the hypothetical section 179
deduction figured in Step 2 from the taxable
income figured in Step 1.
4
• $320,000—The total you and your spouse elected to
Figure a hypothetical amount for the other
deduction using the amount figured in Step 3
as taxable income.
5
Business Income Limit
Subtract the hypothetical other deduction
figured in Step 4 from the taxable income
figured in Step 1.
6
Figure your actual section 179 deduction using
the taxable income figured in Step 5.
7
Subtract your actual section 179 deduction
figured in Step 6 from the taxable income
figured in Step 1.
8
Figure your actual other deduction using the
taxable income figured in Step 7.
• The total cost of section 179 property you and your
spouse elected to expense on your separate returns.
Example. The facts are the same as in the previous
example, except that you elected to deduct $300,000 of
the cost of section 179 property on your separate return
and your spouse elected to deduct $20,000. After the due
date of your returns, you and your spouse file a joint return. The dollar limit for the section 179 deduction is
$320,000. This is the lesser of the following amounts.
• $780,000—The dollar limit less the cost of section 179
property over $2,700,000.
expense on your separate returns.
The total cost you can deduct each year after you apply
the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year.
Generally, you are considered to actively conduct a trade
or business if you meaningfully participate in the management or operations of the trade or business.
Any cost not deductible in 1 year under section 179 because of this limit can be carried to the next year. Special
rules apply to a deduction of qualified section 179 real
property that is placed in service by you in tax years beginning before 2016 and disallowed because of the business income limit. See Special rules for qualified section
179 real property under Carryover of disallowed deduction, later.
Taxable income. In general, figure taxable income for
this purpose by totaling the net income and losses from all
trades and businesses you actively conducted during the
year. Net income or loss from a trade or business includes
the following items.
• Section 1231 gains (or losses).
• Interest from working capital of your trade or business.
• Wages, salaries, tips, or other pay earned as an employee.
For information about section 1231 gains and losses, see
chapter 3 of Pub. 544.
In addition, figure taxable income without regard to any
of the following.
• The section 179 deduction.
• The self-employment tax deduction.
• Any net operating loss carryback or carryforward.
• Any unreimbursed employee business expenses.
Example. On February 1, 2022, the XYZ Corporation
purchased and placed in service qualifying section 179
property that cost $1,080,000. It elects to expense the entire $1,080,000 cost under section 179. In June, the corporation gave a charitable contribution of $10,000. A corporation’s limit on charitable contributions is figured after
subtracting any section 179 deduction. The business income limit for the section 179 deduction is figured after
subtracting any allowable charitable contributions. XYZ’s
taxable income figured without the section 179 deduction
or the deduction for charitable contributions is $1,100,000.
XYZ figures its section 179 deduction and its deduction
for charitable contributions as follows.
Step 1—Taxable income figured without either deduction is $1,100,000.
Step 2—Using $1,100,000 as taxable income, XYZ’s
hypothetical section 179 deduction is $1,080,000.
Step 3—$20,000 ($1,100,000 − $1,080,000).
Step 4—Using $20,000 (from Step 3) as taxable income, XYZ’s hypothetical charitable contribution (limited to 10% of taxable income) is $2,000.
Step 5—$1,098,000 ($1,100,000 − $2,000).
Two different taxable income limits. In addition to the
business income limit for your section 179 deduction, you
may have a taxable income limit for some other deduction.
Step 6—Using $1…

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