What Cannot Be Depreciated Under MACRS Words you may need to know (see Glossary): Placed in service Standard mileage rate Unit-of-production method 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 choose to exclude from MACRS any property that you canproperly depreciate under a method of depreciation not based on a termof years. 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 real or personal property as owned before you placedit in service. If you owned property in 1986 but did not place it inservice until 1987, you do not treat it as owned in 1986. Example.Sandra Coffee bought and took delivery of an item of personalproperty in November 1986. The property was not installed andoperational until February 1987. Although she actually owned theproperty in 1986, it was not placed in service until 1987. Forpurposes of these rules, she does not consider the property as ownedby her until 1987. Personal property.Durby HotelsYou 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 user of the property 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 user of the property 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 includes realproperty 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 lease 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 some 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. 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. Property 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. For information on how to figure ACRS, see Publication 534. Example.On March 3, 1999, you bought a machine from your father, who hadbought and placed it in service on November 1, 1986. You used it onlyfor business in 1999. Because your father owned and used the machineryin 1986 it does not qualify for MACRS unless the deduction under ACRSis greater than the deduction under MACRS. The machine's depreciablebasis is $1,000. Under ACRS, the machine is 5-year property with afirst year percentage rate of 15%. Your deduction under ACRS would be$150 (15% $1,000). Under MACRS, assume that the machine is7-year property. The percentage rate for 7-year property using thehalf-year convention is 14.29% (see Table A-1 in AppendixA). The deduction under MACRS would be $142.90 (14.29% $1,000). Because the depreciation for the machinery under MACRS isless than that under ACRS, you must use MACRS. 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 asdiscussed in chapter 2 of Publication 534. Related Persons You must make the determination of whether you are related toanother person at the time you acquire the property. A partnership acquiring property from a terminating partnershipmust make its determination of whether it is related to theterminating partnership immediately before the event causing thetermination. For this rule, a terminating partnership is one thatsells or exchanges, within 12 months, 50% or more of its totalinterest in partnership capital or profits. To determine whether the owner or user of property has changed, thefollowing are related persons. An individual and a member of his or her immediate family,including a spouse, child, parent, brother, sister, half-brother,half-sister, or any ancestor or lineal descendant. A corporation and an individual who owns directly orindirectly more than 10% of the value of the outstanding stock of thatcorporation. Two corporations that are members of the same controlledgroup. A fiduciary of a trust and a corporation if more than 10% ofthe value of the outstanding stock is owned directly or indirectly byor for the trust or grantor of the trust. The grantor and fiduciary of any trust, and the fiduciaryand beneficiary of any trust. The fiduciaries of two different trusts, and the fiduciariesand beneficiaries of two different trusts, if the same person is thegrantor of both trusts. Certain educational and charitable organizations and anyperson (if an individual, including the members of the individual'sfamily) who directly or indirectly controls the organization. A partnership and a person who owns directly or indirectlyan interest of more than 10% of the capital or profits of thepartnership. Two partnerships, if the same persons directly or indirectlyown more than 10% of the capital or profits of each. The related person and a person who are engaged in trades orbusinesses under common control (see section 52(a) and (b) of theInternal Revenue Code). Two S corporations if the same persons own more than 10% invalue of the outstanding stock of each corporation. An S corporation and a corporation that is not an Scorporation if the same persons own more than 10% in value of theoutstanding stock of each corporation. A corporation and a partnership if the same persons own bothof the following. More than 10% in value of the outstanding stock of thecorporation. More than 10% of the capital interest or profits interest inthe partnership. Ownership of stock or partnership interest.To determine whether an individual constructively owns (or isconsidered to own) any of the outstanding stock of a corporation or aninterest in a partnership, apply the following rules. Stock or a partnership interest owned by or for acorporation, partnership, estate, or trust is constructively ownedproportionately by or for its shareholders, partners, orbeneficiaries. However, for a partnership interest owned by or for a Ccorporation, this applies only to shareholders who own, directly orindirectly, 5% or more in value of the stock of thecorporation. An individual constructively owns the stock or partnershipinterest owned by or for the individual's family. An individual who owns, except by applying rule (2), anystock in a corporation constructively owns the stock owned by or forthe individual's partner. For purposes of rules (1), (2), or (3), treat stock or apartnership interest constructively owned by a person under rule (1)as actually owned by that person. Do not treat stock or a partnershipinterest constructively owned by an individual under rule (2) or (3)as owned by that individual for reapplying either rule (2) or (3) tomake another person the constructive owner of the same stock orpartnership interest. discount hotels in GentCertain nontaxable transfers of property.MACRS does not apply to property involved in certain nontaxabletransfers. This applies to property used before 1987 and transferredafter 1986 to a corporation or partnership if its basis is determinedby reference to the basis in the hands of the transferor ordistributor. If MACRS was elected, it also applies to property usedbefore August 1, 1986, and transferred after July 31, 1986, to acorporation or partnership if its basis is determined by reference tothe basis in the hands of the transferor or distributor. The nontaxable transfers covered by this rule include thefollowing. A distribution in complete liquidation of asubsidiary. A transfer to a corporation controlled by thetransferor. An exchange of property solely for corporate stock orsecurities in a reorganization. A contribution of property to a partnership in exchange fora partnership interest. A partnership distribution of property to a partner. When figuring depreciation, treat the transferee as the transferorto the extent of the amount of the transferor's adjusted basis. Thetransferee is the person receiving the property and the transferor isthe person giving up the property. The transferee cannot use MACRS forthe adjusted basis carried over from the transferor. However, MACRSapplies to that part of the new basis not represented by thecarried-over adjusted basis.