MACRS MACRS consists of two systems that determine how you depreciateyour property. The main system is called the Lucca hotel roomsGeneral DepreciationSystem (GDS). The second system is called the AlternativeDepreciation System (ADS). The main difference between the twosystems is that ADS generally provides for a longer recovery period. Unless you are specifically required by law to use ADS or you electit, you must generally use GDS to figure your depreciation deduction.Property for which you are required by law to use ADS and how to electADS are discussed later. What Can BeDepreciatedUnder MACRS MACRS applies to most tangible depreciable property placed inservice after 1986. Property for which you cannot use MACRS isdiscussed later under What Cannot Be Depreciated Under MACRS. Use of real property changed.You must use MACRS to depreciate all real property you acquiredbefore 1987 that you changed from personal use to business orincome-producing use after 1986. When To Use GDS Most tangible depreciable property falls within the general rule ofMACRS, also called the General Depreciation System (GDS). Because GDSpermits use of the declining balance method over a shorter recoveryperiod, the deduction is greater in the earlier years. However, the law requires you to use ADS for certain property, asdiscussed next. Although your property may qualify for GDS, you can elect on aproperty-by-property or class of assets basis to use ADS. If you makethis election, you can never revoke it. How to make this election isdiscussed later under ADS election. When To Use ADS You must use ADS for the following property. Any property used predominately in a farming business andplaced in service during any tax year in which you make an electionnot to apply the uniform capitalization rules to certain farmingcosts. Any tax-exempt use property. Any tax-exempt bond-financed property. Any imported property covered by an executive order of thePresident of the United States. Any tangible property used predominately outside the UnitedStates during the year. What Cannot BeDepreciatedUnder MACRS You cannot use MACRS to depreciate the following property. Intangible property. Any motion picture film or video tape. Any sound recording. Certain real and personal property placed in service before1987. You can elect to exclude from MACRS any property that you canproperly depreciate under a method of depreciation not based on a termof years. Election To Exclude Property From MACRS If you properly depreciate any property under a method not based ona term of years, such as the unit-of-production method, you can electto exclude that property from MACRS. You make the election byreporting your depreciation for the property on line 18 of Part III ofForm 4562 and attaching a statement as described in the Instructionsfor Form 4562. You must make this election by the return due date(including extensions) for the year you place your property inservice. However, if you timely filed your return for the year withoutmaking the election, you can still make the election by filing anamended return within six months of the due date of the return(excluding extensions). Attach the election to the amended return andwrite "Filed pursuant to section 301.9100-2" on theelection statement. File the amended return at the same address youfiled the original return. Standard mileage rate.If you use the standard mileage rate to figure your tax deductionfor your business automobile, you are treated as having made anelection to exclude the automobile from MACRS. See Publication 463fora discussion of the standard mileage rate. Property Placed in ServiceBefore 1987 There are special rules that may prevent you from using MACRS forproperty placed in service by anyone (for any purpose) before 1987(before August 1, 1986, if MACRS was elected). These rules apply toboth personal and real property. However, the rules for personalproperty are more restrictive. Caution: Do not treat either real or personal property as owned before youplaced it in service. If you owned property in 1986 but did not placeit in service until 1987, you do not treat it as owned in 1986. Personal property.You cannot use MACRS for most personal property (section 1245property) that you acquired after 1986 (after July 31, 1986, if MACRSwas elected) if any of the following apply. You or someone related to you owned or used the property in1986. You acquired the property from a person who owned it in 1986and as part of the transaction the property user did notchange. You leased the property to a person (or someone related tothis person) who owned or used the property in 1986. You acquired the property in a transaction in which: The property user did not change, and The property was not MACRS property in the hands of theperson from whom you acquired it because of (2) or (3). Real property.You cannot use MACRS for certain real property. This includesproperty acquired after 1986 (after July 31, 1986, if MACRS waselected) if any of the following apply. You or someone related to you owned the property in1986. You leased the property back to the person (or someonerelated to this person) who owned the property in 1986. You acquired the property in a transaction in which part ofyour gain or loss was not recognized. MACRS applies only to that partof your basis in the acquired property that represents cash paid orunlike property given up. It does not apply to the substituted portionof the basis. For more information on transactions in which part ofyour gain or loss was not recognized, see Partially NontaxableExchanges in chapter 1 of Publication 544. Exceptions.These rules do not apply to the following. Residential rental property or nonresidential realproperty. Any property, if in the first tax year it is placed inservice, the deduction under ACRS is more than the deduction underMACRS using the half-year convention. cheap hotels online booking HarrachovProperty placed in service after 1980 and before 1987 if itwas transferred to you from a related person or converted frompersonal to business use after 1986 and the deduction under ACRS ismore than the deduction under MACRS. Property placed in service before 1981.For property placed in service before 1981 that was transferred toyou from a related person or converted from personal to business useafter 1986, use the straight line or declining balance method. Thesemethods are based on salvage value and useful life. More information.See Publication 534 for information on how to figure ACRS and othermethods of depreciation. Related Persons For the preceding rules, a related person includes members of yourimmediate family (including your spouse, ancestors, and linealdescendants). For more information on related persons, see Publication 946. How To Figurethe DeductionUsing Percentage Tables Once you determine your property can be depreciated under MACRS andwhether it falls under GDS or ADS, you are ready to figure yourdeduction. To help you figure your deduction, the IRS has establishedpercentage tables. To use these percentage tables to figure your MACRSdeduction each year, you need to know the following information aboutyour property. Its basis. The date it was placed in service. Its property class and recovery period. Which convention to use. Which depreciation method to use. Table 8-1 Basis To figure your depreciation deduction, you must determine the basisof your property. To determine basis, you need to know the cost orother basis of your property. If you bought the property, your basisis the amount you paid for the property plus amounts you paid forother items such as sales tax, freight charges, and installation andtesting fees. Other basis (not cost) refers to basis that isdetermined by the way you received the property. For example, you mayhave received the property through a taxable or nontaxable exchange,for services you performed, as a gift, or as an inheritance. If youreceived property in this or some other way, see chapter 7todetermine your basis. Property changed from personal use.If you held property for personal use and later change it tobusiness use or use in the production of income, your basis is thelesser of the following. The fair market value (FMV) of the property on the date youchange it from personal use to business use. Your original cost or other basis adjusted as follows. Increased by the cost of any permanent improvements oradditions and other additions to basis. Decreased by any tax deductions you claimed for casualty andtheft losses and other items that reduced your basis. Adjusted basis.After you determine your basis, you may have to make certainadjustments (increases and decreases) for events occurring between thetime you acquired the property and the time you placed it in service.These events could include the costs of the following. Installation of utility lines. Legal fees for perfecting the title. Removal of barriers. Settlement of zoning issues. Receiving rebates. For a discussion of items that may affect the basis of yourproperty, see Adjusted Basis in chapter 7. Placed in Service For depreciation purposes, property is placed in service when it isready and available for a specific use, whether in a trade orbusiness, the production of income, a tax-exempt activity, or apersonal activity. Even if you are not using the property, it is inservice when it is ready and available for its specific use. Example 1.A corn planter that is delivered to the farm ready to be used inDecember 1999 is placed in service in 1999 even though it will not beused until the spring of 2000. Example 2.If the planter comes unassembled in December 1999 and is puttogether in February 2000, it is not placed in service until 2000. Example 3.If the planter was delivered and assembled in February 2000 but notused until April 2000, it is placed in service in February 2000, sincethis is when the planter was in a condition of readiness for itsspecified use. Fruit or nut trees and vines.If you acquire an orchard, grove, or vineyard and the trees orvines have not yet reached the income-producing stage, yourdepreciation begins when they reach the income-producing stage. Immature livestock.If you acquire immature livestock for draft, dairy, or breedingpurposes, your depreciation begins when they reach maturity. Thismeans depreciation begins when the livestock reach the age when theycan be worked, milked, or bred. When this occurs, your basis fordepreciation is your initial cost for the immature livestock. Property Classes andRecovery Periods Each item of property depreciated under MACRS is assigned to aproperty class. The property class establishes the number of yearsover which you recover the basis of your property. This period of timeis called a recovery period. Property classes.Under MACRS, tangible property you place in service after 1986, orafter July 31, 1986, if elected, falls into one of the followingclasses. 3-year property. 5-year property. 7-year property. 10-year property. 15-year property. 20-year property. Residential rental property. Nonresidential real property. Recovery periods.See Table 8-1 for recovery periods under both GDSand ADS for some commonly used assets. For a complete list of classlives and recovery periods, see the Table of Class Lives andRecovery Periods in Appendix B of Publication 946. House trailers for farm laborers.Use one of the following recovery periods to depreciate a housetrailer you supply as housing for those who work on your farm. Whetherthe house trailer is mobile or not determines which recovery periodyou can use. If the house trailer is mobile and has wheels and a historyof movement, depreciate its cost over a 10-year recovery period underADS or a 7-year recovery period under GDS. If the house trailer is not mobile, its wheels removed, andpermanent utilities and pipes are attached to it, depreciate its costover a 25-year recovery period under ADS or a 20-year recovery periodunder GDS. Water wells.Depreciable water wells used to provide water for raising poultryand livestock are land improvements and have a 15-year recovery periodunder GDS and a 20-year recovery period under ADS. The types of water wells that can be depreciated are discussedearlier under Irrigation systems and water wells. Conventions To figure your depreciation deduction for both the year in whichyou place property in service and the year in which you dispose of theproperty, use one of the following conventions. The half-year convention. The mid-month convention. The mid-quarter convention. Half-year convention.Generally, you use this convention for property other thannonresidential real and residential rental property. Under thehalf-year convention, you treat all property placed in service ordisposed of during a year as placed in service or disposed of at themidpoint of that year. This means that no matter when in the year youbegin or end the use of the property, you treat it as if you began orended its use in the middle of the year. Mid-month convention.You use the mid-month convention for the following types ofproperty. Nonresidential real property. Residential rental property. Under this convention, you treat all property placed in service(or disposed of) during a month as placed in service (or disposed of)at the midpoint of the month. This means that regardless of whenduring a month you place property in service or dispose of it, youtreat it as being placed in service (or disposed of) in the middle ofthat month. Mid-quarter convention.You must use this convention when the total depreciable bases ofMACRS property you placed in service during the last 3 months of theyear are more than 40% of the total depreciable bases of all MACRSproperty you placed in service during the entire year. When thishappens, you must use the mid-quarter convention for all MACRSproperty you placed in service during the year. Under the mid-quarterconvention, you treat all property placed in service or disposed ofduring the year as placed in service in the middle of the quarter. Total bases.To determine the total bases of property, do not include thefollowing. Residential rental property. Nonresidential real property. Property you placed in service and disposed of in the sametax year. Depreciable basis.To determine whether you must use the mid-quarter convention, thedepreciable basis of property is your basis multiplied by thepercentage of business/investment use and then reduced by thefollowing. Any amortization taken on the property. Any section 179 deduction claimed on the property. Any deduction claimed for clean-fuel vehicles or forclean-fuel vehicle refueling property. Depreciation Methods For personal property placed in service in a farming business after1988 you must use the 150% declining balance method over a GDSrecovery period or you can elect one of the following methods. The straight line method over a GDS recovery period. The straight line method over an ADS recovery period. Caution: For property placed in service before 1999, you could elect to usethe 150% declining balance method using the ADS recovery periods. Ifyou made this election, continue to use the same method and recoveryperiod for that property. You can depreciate real property using the straight line methodunder either GDS or ADS. Under MACRS, there are four methods you can use to figuredepreciation. The following table lists the types of property you candepreciate under each method. You can use this table to help youdetermine the method to use for a specific property class. Thedeclining balance method is abbreviated as DB and the straight linemethod is abbreviated as SL. Depreciation Methods Method Type of Property 200% DBusing GDS Nonfarm 3-, 5-, 7-, and10-year property 150% DBusing GDS All farm property (exceptreal property) All 15- and 20-year property Nonfarm 3-,5-, 7-, and10-year property* SL usingGDS Nonresidential real property Residential rental property Trees or vines bearing fruitor nuts All 3-, 5-, 7-, 10-, 15-, and20-year property* SL usingADS Property used predomi-nantly outside the U.S. Tax-exempt property Tax-exempt bond-financedproperty Imported property** Any property for which youelect to use this method* *Elective method**See section 168(g)(6) of the Internal RevenueCode Caution: You cannot use the 200% declining balancemethod for farm property placed in service after 1988. If you use a declining balance method, you switch to the straightline method when that method provides a greater deduction. TaxTip: If you use the MACRS percentage tables, you do not need todetermine in which year your deduction is greater using the straightline method. The tables have the switch to the straight line methodbuilt into their rates. Fruit or nut trees and vines.Depreciate trees and vines bearing fruit or nuts under GDS usingthe straight line method over a 10-year recovery period. ADS required for some farmers.If you elect not to apply the uniform capitalization rules to anyplant produced in your farming business, you must use ADS for allproperty you place in service in any year the election is in effect.See chapter 7for a discussion of the application of the uniformcapitalization rules to farm property. Farming business.A farming business is any trade or business involving cultivatingland or raising or harvesting any agricultural or horticulturalcommodity. A farming business includes any of the following. Operating a nursery or sod farm. Raising or harvesting crops. Raising or harvesting trees bearing fruit, nuts, or othercrops. Raising ornamental trees. (An evergreen tree is notconsidered an ornamental tree if it is more than 6 years old when itis severed from its roots.) Raising, shearing, feeding, caring for, training, andmanaging animals. Processing.In general, a farming business includes processing activities thatare normally part of the growing, raising, or harvesting ofagricultural products. However, a farming business generally does notinclude the processing of commodities or products beyond thoseactivities that are normally part of the growing, raising, orharvesting of such products. Example 1.If you are in the trade or business of growing fruits andvegetables, you can harvest, wash, inspect, and package the fruits andvegetables for sale. Such activities are normally part of the raisingof these crops by farmers. You will be considered to be in thebusiness of farming with respect to the growing of fruits andvegetables and the processing activities that are part of theirharvest. Example 2.You are in the business of growing and harvesting wheat and othergrains. You also process grain you have harvested in order to producebreads, cereals, and other similar food products. You then sell theseproducts to customers in the course of your business. Although you arein the farming business with respect to the growing and harvesting ofgrain, you are not in the farming business with respect to theprocessing of the grain to produce the food products. Electing a method.As shown in the table, Depreciation Methods, you canelect a different method for depreciation for certain types ofproperty. The election must be made by the due date of the return(including extensions) for the year you place the property in service.However, if you timely filed your return for the year without makingthe election, you can still make the election by filing an amendedreturn within six months of the due date of your return (excludingextensions). Attach the election to the amended return and write"Filed pursuant to section 301.9100-2" on the electionstatement. File the amended return at the same address you filed theoriginal return. Caution: If you elect to use a different method for one item in a propertyclass, you must apply the same method to all property in that classplaced in service during the year of the election. However, you canmake the election on a property-by-property basis for residentialrental and nonresidential real property. Once you make the election,you cannot change it. Table 8-2 Straight line election.Instead of using the declining balance method, you can elect to usethe straight line method over the GDS recovery period. ADS election.Although your property may come under GDS, you can elect to useADS. ADS uses the straight line method of depreciation over fixed ADSrecovery periods. The ADS recovery periods for many assets used in thebusiness of farming are listed in Table 8-1.Additional ADS recovery periods for other classes of propertymay be found in the Table of Class Lives and Recovery Periodsin Appendix B of Publication 946. Make the election by completing line 16, Part II of Form 4562. Figuring the MACRS Deduction You can determine your MACRS depreciation deduction in one of twoways. You can use the percentage tables shown in Appendix A ofPublication 946. You can figure your own deduction. See How To Figurethe Deduction Without Using the Tables in chapter 3 ofPublication 946. Caution: Figuring your own MACRS deduction will generally result in aslightly different amount than using the tables. Rules for using the tables.The following rules cover the use of the percentage tables. You must apply the rates in the percentage tables to yourproperty's unadjusted basis (defined later). You cannot use the percentage tables for a short tax year.See chapter 3 of Publication 946for information on how to figure thededuction in a short tax year. You must continue to use the tables for the entire recoveryperiod even if there are adjustments to the basis of your property forthe reasons listed below. Depreciation allowed or allowable. An addition or improvement to the property. (An addition orimprovement is depreciated as a separate property.) You must stop using the tables if there is an adjustment tothe basis of your property for any reason other than those listed in(3) above. Figuring unadjusted basis.You must apply the table rates to your property's unadjusted basiseach year of the recovery period. Unadjusted basis is theamount you would use to figure gain on a sale but figured withouttaking into account any depreciation taken in earlier years. However,you do reduce your original basis by any of the following items thatapply. Amortization taken on the property. Section 179 deduction claimed on the property. Deduction claimed for clean-fuel vehicle or clean-fuelvehicle refueling property. Electric vehicle credit. (The lesser of $4,000 or 10% of thecost of the vehicle, even if the credit is less than thatamount.) For business property you purchase during the year the unadjustedbasis is its cost minus these adjustments. If you trade property, your unadjusted basis in the propertyreceived is the cash paid plus the adjusted basis of the propertytraded minus these adjustments. The clean-fuel vehicle and clean-fuel vehicle refueling propertydeductions and the credit for electric vehicles are discussed inchapter 15 of Publication 535. Adjustment due to casualty loss.If you reduce the basis of your property because of a casualty, youcannot continue to use the tables. For the year of adjustment and therest of the recovery period, figure the depreciation using theproperty's adjusted basis at the end of the year of adjustment. 150% table applying the half-year convention.Table 8-2 has the percentages for 3-, 5-, 7-, and20-year property. The percentages are based on the 150% decliningbalance method with a change to the straight line method. This tablecovers only the half-year convention and the first 8 years for 20-yearproperty. See Appendix A in Publication 946for complete MACRS tables,including tables for the mid-quarter and mid-month convention. Example 1.This year, you buy and place in service an item of 7-year propertyfor $10,000. You do not elect a section 179 deduction for thisproperty. The unadjusted basis of the property is $10,000. You use thepercentage tables to figure your deduction. Since this is 7-year property, you multiply $10,000 by 10.71% toget this year's depreciation of $1,071. For next year, you figure yourdepreciation deduction by multiplying $10,000 by 19.13% to get $1,913. Example 2.You have a barn constructed on your farm at a cost of $20,000. Youplace the barn in service this year. The barn is 20-year property andyou use the table percentages to figure your deduction. You figurethis year's depreciation by multiplying $20,000 (unadjusted basis) by3.75% to get $750. For next year, your depreciation will be $20,000multiplied by 7.219%, or $1,443.80. Straight line table applying the half-year convention.The following table has the straight line percentages for 3-, 5-,7-, and 20-year property using the half-year convention. The tablecovers only the first 8 years for 20-year property. See Appendix A inPublication 946for complete MACRS tables, including tables for themid-quarter and mid-month convention. Straight Line Percentages Year 3-Year 5-Year 7-Year 20-Year 1 16.67% 10% 7.14% 2.5% 2 33.33 20 14.29 5.0 3 33.33 20 14.29 5.0 4 16.67 20 14.28 5.0 5 20 14.29 5.0 6 10 14.28 5.0 7 14.29 5.0 8 7.14 5.0 Figuring MACRS deductions without the tables.If you are required to or would prefer to figure your owndepreciation without using the tables, see How To Figure theDeduction Without Using the Tables in chapter 3 of Publication 946. Dispositions If you dispose of depreciable property at a gain, you may have toreport, as ordinary income, all or part of the gain. See chapter 11. General Asset Accounts To make it easier to figure MACRS depreciation, you can groupseparate properties into one or more general asset accounts. You canthen depreciate all of the properties in each account as a single itemof property. Each account can include only property with similarcharacteristics, such as asset class and recovery period. Someproperty cannot be included in a general asset account. There areadditional rules for passenger automobiles, disposing of property,converting property to personal use, and property that generatesforeign source income. After you have set up a general asset account, you generally figurethe amount of depreciation for each account by using the depreciationmethod, recovery period, and convention that applies to the propertyin the account. For each general asset account, record thedepreciation allowance in a separate depreciation reserve account. Property you cannot include.You cannot include property in a general asset account if you useit in both a trade or business (or for the production of income) andin a personal activity in the year in which you first place it inservice. How To Group Property in General Asset Accounts Each general asset account must include only property you placed inservice in the same year and that has the following in common. Asset class. Recovery period. Depreciation method. Convention. The following rules also apply when you establish a general assetaccount. No asset class. Property without an asset class,but with the same depreciation method, recovery period, andconvention, which you place in service in the same year, can begrouped into the same general asset account. Mid-quarter convention. Property subject to themid-quarter convention can only be grouped into a general assetaccount with property that is placed in service in the samequarter. Mid-month convention. Property subject to themid-month convention can only be grouped into a general asset accountwith property that is placed in service in the same month. Passenger automobiles. Passenger automobilessubject to the limits on passenger automobile depreciation must begrouped into a separate general asset account. Dispositions and Conversions It is considered a disposition of property in a general assetaccount when you do any of the following. Permanently withdraw it from use in your trade or businessor from the production of income. Transfer it to a supplies, scrap, or similar account. Sell, exchange, retire, physically abandon, or destroyit. The retirement of a structural component of real property isnot a disposal. The unadjusted depreciable basis and the depreciation reserve ofthe general asset account are not affected by your disposition ofproperty from the general asset account. You must remove from the general asset account any property youchange to personal use. Unadjusted depreciable basis.The unadjusted depreciable basis of an item of property in ageneral asset account is the amount you would use to figure gain onthe sale of the property but figured without taking into account anydepreciation taken in earlier years. The unadjusted depreciable basis of a general asset account is thetotal of the unadjusted depreciable bases of all of the property inthe account. For more information on general asset accounts, see chapter 3 inPublication 946.