Depreciation and
Section 179 Deduction
Agriculture Handbook 718,
pages 29-38
1
2
Depreciable Property
What Is Depreciation


Depreciation is the annual deduction to
recover the cost (or other basis) of
business or income-producing property
with a determinable useful life of more
than one year
3
Depreciation and Section 179 Deduction
Property is depreciable if it meets the
following requirements:
 It has a determinable useful life
 It wears out, decays, gets used up,
becomes obsolete or loses value from
natural causes
 It is either used in a business or held for
the production of income
4
Depreciable Forestry Assets
Examples


Land and Land Improvements

Depreciable Land Improvements:
 Bridges and culverts
 Fencing
 Temporary roads
Equipment and Machinery
 Trucks
 Power saws

Land is not depreciable
Land improvements are depreciable, for
examples:





fences
temporary roads
surfaces of permanent roads
bridges, and
buildings
5
Modified Accelerated Cost Recovery
System (MACRS)
6
General Depreciation System vs. Alternative
Depreciation System


For most forestry property, use the
Modified Accelerated Cost Recovery
System (MACRS) to calculate depreciation



It is for most tangible property placed in
service after 1986 (1986 Tax Reform Act)
7
Depreciation and Section 179 Deduction
General depreciation system (GDS)
generally allows faster cost recovery
applicable to most properties
Alternative depreciation system (ADS)
typically allows longer recovery period
and straight-line depreciation
8
MACRS Property Basis
How to Figure the MACRS Deduction

To figure MACRS deduction, you must
first determine the property’s info:
 Its basis
 Its placed in service date
 Its property class and recovery period
 The convention
 The depreciation method

Basis is the measure of your
investment in the property for tax
purposes
For example, for property you buy,
your original basis is usually its
purchase cost
9
MACRS Property Information

Property Class and Recovery Period
Placed-in-service date
 Depreciation begins when your property
becomes ready and available for a particular
use, regardless of
 whether
it is actually put into use at that time
and
 whether the use is associated with a trade or
business, production of income, or a personal
activity
11
Depreciation and Section 179 Deduction
10
 Each
item of property is assigned to a
property class
 The property class establishes the
number of years over which the basis is
recovered
 This period of time is called the recovery
period
12
Quick References
Recovery Period
Recovery Period for
Land Improvements
(in Years)
GDS
ADS
Computers and peripherals…………
Automobiles…………………………..
Office furniture……………………….
Logging and road building equipment*..
Over-the-road (semi) tractors……….
Nonresidential real property*…………
5
5
7
5
3
39
5
5
10
6
4
40
Land improvements such as





Recovery Period
(in Years)
GDS
ADS
15
20
Bridges
Culverts
Non-farm fences
Temporary roads and
surfaces of permanent road
* Used by logging and sawmill operators for their own account
* For property placed in service after 5/12/1993
See Table 5-1. Ag. Handbook No. 718, p.30
13
14
Conventions



Which Convention to Use?
Half-year convention – Treats all property as
placed in service, or disposed of, at the midpoint of that tax year
Mid-quarter convention – Treats all property as
placed in service, or disposed of, at the midpoint of the quarter
Mid-month convention – Treats all property as
placed in service, or disposed of, at the midpoint of the month

15
Depreciation and Section 179 Deduction
Generally, you use the half-year
convention to figure the deduction for
property other than residential rental and
nonresidential real property
16
Mid-Quarter Convention

Which Convention to Use?
If during any tax year the total depreciable
bases of all MACRS property placed in service
during the last 3 months of the tax year
exceeds 40 percent of the total depreciable
bases of all MACRS property placed in service
during the tax year, you must use the midquarter convention

The mid-month convention is used for
residential rental property and nonresidential
real property
17
18
Depreciation Methods

Depreciation Methods
200% declining balance method

150% declining balance method


Used for non-farm property in the 3, 5, 7 or 10 year
property classes

Use the half-year or mid-quarter convention

19
Depreciation and Section 179 Deduction
Used for farm business property (except
real property) and all other property in the
15 and 20 year property classes
apply the half-year or mid-quarter
convention
20
Depreciation Method

Depreciation Methods
Straight-line method



Used for residential rental and
nonresidential real property
apply the mid-month convention
Straight-line election
 You may elect to use the straight line
method instead of using the declining
balance method
 Make the election by entering “S/L” in
column (f) of part II of Form 4562
 Once made, this election cannot be
changed
21
22
Units-of-production Method


Units-of-production Example
You may elect to exclude certain timberrelated property – e.g. temporary logging
roads – from MACRS and depreciate it using
the units-of-production method

The property is depreciated based on the
number of units of timber harvested in a tax
year compared to the total number of units
harvested over the life of the property
23
Depreciation and Section 179 Deduction
A good example is costs for temporary
logging roads, bridges, and culverts

constructed solely for use in harvesting a
specified timber tract and

On completion of harvesting, it will no longer be
useful to the timber owner
24
Units-of-production Example

Units-of-production Example
Assume you spend $10,000 dollars to build a
temporary road solely to harvest 480 MBF of
timber. The logger harvests 300 MBF this
year, and harvests the remaining 180 MBF
next year. What are your depreciation
deductions?

Under the units-of-production, you can
depreciate the cost of the road over 2 years
 $6,250 the first year:
$10,000 x (300MBF/480MBF)
 $3,750
the next year:
$10,000 x (180MBF/480MBF)
From Example 5-5, Ag. Handbook No. 718, p.35
25
26
Calculating MACRS Deductions

IRS Tables
You can figure the depreciation in
two options:



You can use the IRS percentage tables,
or
You can compute deduction without
the IRS tables
27
Depreciation and Section 179 Deduction

There is a separate table for each
depreciation method, recovery period,
and convention
Apply the table percentages to the
unadjusted basis of the property each
year of the recovery period
28
Sample MACRS 200% Table
Half-year Convention
Year
3-Year
5-Year
7-Year
1
33.33%
20%
14.29%
2
44.45%
32%
24.49%
3
14.81%
19.2%
17.49%
4
5
7.41%
11.52%
11.52%
12.49%
8.93%
6
5.76%
Trailer Example

Assume you buy a trailer for $12,500 that you
will use entirely for your forestry operation.
Calculate your depreciation using the MACRS
tables.
8.92%
7
8.93%
8
4.46%
From Example 5-4, Ag. Handbook No. 718, p.35
29
30
Trailer Example
Trailer Example


First, we need to determine the recovery
period:


First year:
Second year:
 Third year:
 Fourth year:
 Fifth year:
 Sixth year:

Trailers are 5-year property

Next, determine the correct MACRS
depreciation table by the convention.

Use Table A-1 for rates on a 5-year non-farm
property, 200% declining balance and a half-year
convention.
31
Depreciation and Section 179 Deduction
Depreciation is calculated as follows, using Table A-1:
$12,500 x 20% = $ 2,500
$12,500 x 32% = $ 4,000
$12,500 x 19.2% = $ 2,400
$12,500 x 11.52% = $ 1,440
$12,500 x 11.52% = $ 1,440
$12,500 x 5.76% = $ 720
32
Mixed Use
Bonus Depreciation


Note: if you use the trailer only 70 percent for
business purposes, you can only claim 70
percent of the above amounts
You may take a 50% depreciation, on top of
regular depreciation for 2009




Applies to new property placed in service in 2009
Taken in the first year the property is placed in
service only
Extended by American Recovery and Reinvestment
Act of 2009 (ARRA)
Originally enacted in 2008
33
34
Section 179 Deduction

Section 179 Deduction
You may deduct immediately up to $250,000 in 2009
of the cost of qualified personal property if your
timber operation is an active trade or business.

The $250,000 max limit is extended by
the ARRA


The deduction is limited to aggregate taxable
income from your active trades or businesses:



including income earned as an employee and
certain timber income (Section 631 gains)
Without ARRA extension, the deduction
would be $133,000 for 2009 (Rev. Proc.
2008-66)
If your investment is over $800,000, however,
your Sec. 179 deduction will be reduced.
35
Depreciation and Section 179 Deduction
36
Example: Section 179 Deduction

Example: Section 179 Deduction
In 2009, you purchased




$7,000 in a used heavy duty truck
$20,000 in a used tractor
both to be used 100 percent for your timber
business
You have $25,000 of aggregate taxable business
income for the year.

Your investment in section 179 property
$27,000 is less than the $250,000 max
deduction allowed

However, your section 179 deduction for 2009
is limited to your $25,000 of aggregate
business income
You can divide it between the truck and the
tractor as you choose

37
38
Section 179 Deduction
Example: Section 179 Deduction


Carry the remaining $2,000 ($27,000 – $25,000)
forward to future tax years until it is used up
The deduction is reduced one dollar for each
dollar of investment in section 179 property
over $800,000 for 2009
For example:
You place $900,000 of section 179
property
in service during 2009, your
deduction is limited to $125,000
($250,000 – ($900,000 – $800,000))
39
Depreciation and Section 179 Deduction
40
Section 179 Deduction Carryover
Section 179 Deduction


The amount of eligible cost that is not
deductible in one year due to the above
limits may be carried forward
indefinitely to later years until it can be
deducted

Property held for the production of income,
such as an investment, is not eligible for the
Section 179 deduction
Neither is property held by an estate or trust
41
42
Section 179 Deduction
Recapture Provisions
Section 179 Deduction



You must elect to take the deduction for the
tax year in which the property is placed in
service
You can take the deduction on an amended
return only within the time prescribed by law
Report the Section 179 deduction on Form
4562
43
Depreciation and Section 179 Deduction

Generally a portion of Section 179 deduction
is recaptured as ordinary income if the
property is not used in business more than 50
percent of the time before the recovery period
expires

Report the recapture of a Section 179
deduction on Form 4797
44
Multiple Depreciation Example I
Order of Taking Depreciation
Deductions
Taxpayer Todd in 2009




spent $20,000 for a structure (39-yr non-residential
real property) which he placed in service in his timber
business in July
purchased a $30,000 used skidder in September
Purchased a $60,000 used over-the-road tractor in
October (4th Quarter)
His net taxable income from all his trade and
businesses for 2009 exceeds $60,000.

The bonus depreciation deduction was
calculated after any section 179 deduction and
before the regular depreciation deduction
What are his total depreciation deductions for 2009?
45
Solution
46
Solution – Mid-Quarter Convention
Section 179 deduction on the skidder


The structure does not qualify for Section 179
because it is not personal property
Since more than 40 percent of the basis in
depreciable property was placed in service
during the last quarter of the year, Todd must
use the mid-quarter convention
47
Depreciation and Section 179 Deduction
$ 30,000
Bonus Depreciation (elect out)
$0
MACRS deduction on tractor (3-yr property)
$60,000 x 0.0833 . . . . . . . . . . .
$ 4,998
MACRS deduction on structure (39-yr property)
$20,000 x 0.01177 . . . . . . . . . .
$
Total Deduction
235
$35,233
48
Multiple Depreciation Example II
Half-Year Convention
Multiple Depreciation Example II

What if Todd had placed the over-the-road
tractor ($60,000) in service in September and
the skidder ($30,000) in service in October?

He would calculate his depreciation
deductions using the half-year convention
instead of the mid-quarter convention
This would have resulted more in depreciation
deductions for the tax year
49
50
IRS Publications Covering
Depreciation
Solution-Half-Year Convention
Section 179 deduction on the skidder . . . . .
$ 30,000
Bonus depreciation (elect out) . . . . . . . . . . .
$0


MACRS deduction on tractor (3-yr property)
$60,000 x 0.3333 . . . . . . . . .
$ 19,998
MACRS deduction on structure (39-yr property)
$20,000 x 0.01177 . . . . . . . .
$
Total depreciation & sect. 179 deductions . . .
$50,233


235

Pub. 17, “Your Federal Income Tax”
Pub. 225, “Farmer’s Tax Guide”
Pub. 334, “Tax Guide for Small Business”
Pub. 534, “Depreciating Property Placed in
Service Before 1987”
Pub. 946, “How to Depreciate Property” *
* Provides the most thorough coverage and all MACRS
and CLDR tables
51
Depreciation and Section 179 Deduction
52
53
Depreciation and Section 179 Deduction
MACRS Tables
Depreciation and
Section 179 Deduction
Recovery Periods by Property Class
Modified Accelerated Cost Recovery System MACRS
General Depreciation System GDS
GDS
3
Property Type
Over-the–road (semi) tractors
5
Computers and peripherals, autos; pickup trucks; logging
equipment and road building equipment used by logging and
sawmill operators for their own account
5
Portable sawmills; over-the road trailers; typewriters, calculators,
adding and accounting machines, copiers, and duplicating
equipment
7
Office furniture, fixtures and equipment; farm machinery and
equipment, such as tractors and planting machines, and farm
fences; single-purpose agricultural or horticultural structures
placed in service before 1989; any property that does not have a
class life and is otherwise not classified under Section 168 (e) (2)
or (3)
10
Single-purpose agricultural or horticultural structures placed in
service after 1988; property with a class life of 16 years or more,
but less than 20 years
15
Land improvements such as bridges, culverts, non-farm fences,
temporary roads, and surfaces of permanent roads
20
Farm buildings (except single-purpose agricultural and
horticultural structures)
27.5
Residential rental property
31.5
Nonresidential real property placed in service before May 13, 1993
39
Nonresidential real property placed in service after May 12, 1993
Page 69 of 110 of Publication 946
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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
Table A-1.
3-, 5-, 7-, 10-, 15-, and 20-Year Property
Half-Year Convention
Depreciation rate for recovery period
Year
1
2
3
4
5
3-year
5-year
7-year
10-year
15-year
33.33%
44.45
14.81
7.41
20.00%
32.00
19.20
11.52
11.52
14.29%
24.49
17.49
12.49
8.93
10.00%
18.00
14.40
11.52
9.22
5.00%
9.50
8.55
7.70
6.93
3.750%
7.219
6.677
6.177
5.713
5.76
8.92
8.93
4.46
7.37
6.55
6.55
6.56
6.55
6.23
5.90
5.90
5.91
5.90
5.285
4.888
4.522
4.462
4.461
3.28
5.91
5.90
5.91
5.90
5.91
4.462
4.461
4.462
4.461
4.462
2.95
4.461
4.462
4.461
4.462
4.461
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
Table A-2.
20-year
2.231
3-, 5-, 7-, 10-, 15-, and 20-Year Property
Mid-Quarter Convention
Placed in Service in First Quarter
Depreciation rate for recovery period
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
3-year
5-year
7-year
10-year
15-year
20-year
58.33%
27.78
12.35
1.54
35.00%
26.00
15.60
11.01
11.01
25.00%
21.43
15.31
10.93
8.75
17.50%
16.50
13.20
10.56
8.45
8.75%
9.13
8.21
7.39
6.65
6.563%
7.000
6.482
5.996
5.546
1.38
8.74
8.75
1.09
6.76
6.55
6.55
6.56
6.55
5.99
5.90
5.91
5.90
5.91
5.130
4.746
4.459
4.459
4.459
0.82
5.90
5.91
5.90
5.91
5.90
4.459
4.460
4.459
4.460
4.459
0.74
4.460
4.459
4.460
4.459
4.460
0.557
Page 69
Page 72 of 110 of Publication 946
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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
Table A-7.
Nonresidential Real Property
Mid-Month Convention
Straight Line—31.5 Years
Month property placed in service
Year
1
1
2–7
8
9
10
2
3
4
5
6
7
8
9
10
11
12
3.042%
3.175
3.175
3.174
3.175
2.778%
3.175
3.174
3.175
3.174
2.513%
3.175
3.175
3.174
3.175
2.249%
3.175
3.174
3.175
3.174
1.984%
3.175
3.175
3.174
3.175
1.720%
3.175
3.174
3.175
3.174
1.455%
3.175
3.175
3.174
3.175
1.190%
3.175
3.175
3.175
3.174
0.926%
3.175
3.175
3.174
3.175
0.661%
3.175
3.175
3.175
3.174
0.397%
3.175
3.175
3.174
3.175
0.132%
3.175
3.175
3.175
3.174
11
12
13
14
15
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
16
17
18
19
20
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
21
22
23
24
25
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
26
27
28
29
30
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
3.175
3.174
31
32
33
3.174
1.720
3.175
1.984
3.174
2.249
3.175
2.513
3.174
2.778
3.175
3.042
3.174
3.175
0.132
3.175
3.174
0.397
3.174
3.175
0.661
3.175
3.174
0.926
3.174
3.175
1.190
3.175
3.174
1.455
9
10
11
12
Table A-7a. Nonresidential Real Property
Mid-Month Convention
Straight Line—39 Years
Month property placed in service
Year
1
1
2–39
40
Page 72
2.461%
2.564
0.107
2
2.247%
2.564
0.321
3
2.033%
2.564
0.535
4
1.819%
2.564
0.749
5
1.605%
2.564
0.963
6
1.391%
2.564
1.177
7
1.177%
2.564
1.391
8
0.963%
2.564
1.605
0.749%
2.564
1.819
0.535%
2.564
2.033
0.321%
2.564
2.247
0.107%
2.564
2.461