®

Passenger Autos—GVW (unloaded) up to 6,000 lbs.
Depreciation limit—Acquisition year (special depreciation applies) 1 $ 11,160
Depreciation limit—Acquisition year (no special depreciation) 1
Second-year limit
Third-year limit
All years thereafter
Trucks and Vans—GVW (loaded) up to 6,000 lbs.
Depreciation limit—Acquisition year (special depreciation applies) 1
Depreciation limit—Acquisition year (no special depreciation) 1
Second-year limit
Third-year limit
All years thereafter
Car, Truck or Van (Including SUVs and Minivans)
GVW over 6,000 but not over 14,000 lbs.
Depreciation limit
Maximum Section 179 deduction
3,160
5,100
3,050
1,875
$ 11,460
3,460
5,500
3,350
1,975
N/A
$ 25,000 3
Standard Mileage Rates
Business
Depreciation component
Charitable
Medical and moving
56¢
22¢
14¢
23.5¢
1 Applies to the sum of MACRS depreciation, special (bonus) depreciation (if
2 available) and Section 179 expense claimed.
The special (bonus) depreciation allowance is not available for business vehicles placed in service after 2013 unless legislation is enacted that extends the provision.
3 Some exceptions, including pickups with a bed at least six feet long. Overall limit on Section 179 expensing also applies.
1
Maximum deduction
Qualifying property threshold before phase-out
$ 500,000
2,000,000
Additional deduction for empowerment zones 2
Maximum deduction for qualified real property 3
Maximum deduction (per vehicle) for car, truck or van (including
SUVs and minivans) with GVW over 6,000 but not over 14,000 lbs.
35,000
250,000
25,000
1
2
3
The increased Section 179 deduction and qualifying property threshold that applied to tax years beginning in 2013 (see the Section 179 Annual Limits table on Page
5-1) are not available in later tax years unless legislation is enacted to extend them.
See Increased Limits for Targeted Areas on Page 5-2.
See Qualified Real Property on Page 5-8 .
Recovery Period (Years)
GDS/AMT ADS
Assets Used in All Business Activities
Airplanes (noncommercial) and helicopters
Automobiles
Computers and peripheral equipment
Heavy general purpose trucks (13,000 lbs. or more)
Light general purpose trucks (less than 13,000 lbs.)
Office furniture and equipment
Tractor units (for over-the-road use)
Trailers
Typewriters, calculators, copiers
Assets Used in Agricultural Activities
Agricultural machinery and equipment
Cattle (breeding or dairy)
Farm buildings, other than single purpose
Fences (agricultural)
Horses (breeding or work) 12 years old or less
Horses (breeding or work) over 12 years old
Single-purpose agricultural or horticultural structures
Trees or vines bearing fruits or nuts
Assets Used in Oil and Gas Industry
Assets used in drilling oil and gas wells
Assets used in exploring and producing oil and gas
Specialized Assets
Assets unique to wholesale and retail trade, and personal and professional services
High technology medical equipment
Section 1245 assets used in marketing petroleum and petroleum products
Real Property
Billboards
Land improvements (sidewalks, roads, drainage facilities, bridges, fences, landscaping, radio towers)
Nonresidential real property
Qualified leasehold improvement property 1
Qualified restaurant property 1
5
5
5
5
5
7
3
5
5
7
7
7
5
20
3
10
10
5
7
5
5
5
15
15
39
15
15
6
6
5
5
5
6
6
10
4
6
14
9
5
9
20
20
40
39
39
Qualified retail improvement property 1
Residential rental property
Retail motor fuels outlet
Other
Appliances, carpet and furniture used in a residential rental property
Assets used in construction activities by general building contractors, real estate subdividers and developers
1
15
27.5
15
5
5
39
40
20
9
6
15 (GDS/AMT) / 39 (ADS) for property placed in service at certain times before 2014.
See Leasehold Improvements on Page 7-9.
10
7
25
10
10
10
15
20
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®
© 2014 Thomson Reuters/Tax & Accounting.
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The Depreciation Quickfinder assignable without consent.
® Handbook is published by Thomson Reuters.
Reproduction is prohibited without written permission of the publisher. Not
The Depreciation Quickfinder ® Handbook is to be used as a first-source, quick reference to basic tax principles applied to property used in a trade or business or for the production of income. Its focus is to present often-needed reference information in a concise, easy-to-use format. The summaries, highlights, tax tips and other information included herein are intended to be of concern for the average taxpayer only. Information included is general in nature and we acknowledge the existence of many exceptions. The information this publication contains has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. The publisher is not engaged in rendering legal, accounting or other advice and will not be held liable for any actions or suit based on this handbook. For further information that applies to a specific tax situation, see IRS publications, rulings, regulations, court cases and Code sections applicable to that situation. This handbook is not intended to be used as your only reference source.
Asset
Real estate—commercial
Real estate—residential rental
Recovery Period
39 years
27.5 years
Listed property used 50% or less in trade or business ADS recovery period
Trees or vines bearing fruits or nuts 10 years
Property used predominantly in farming if taxpayer elects out of uniform capitalization rules for plants with long preproductive life ADS recovery period
Qualified leasehold improvement property 15 years 1
Qualified restaurant property 15 years 1
Qualified retail improvement property
Property used predominantly outside of the U.S.
Property used in a tax-exempt activity or financed by tax-exempt bonds
Property imported from a country subject to trade restrictions
Water utility property
15 years 1
ADS recovery period
ADS recovery period
ADS recovery period
25 years
1 A 15-year recovery period applied to property placed in service at certain times before 2014.
See Leasehold Improvements on Page 7-9.
13
14
15
16
9
10
11
12
7
8
5
6
3
4
1
2
Year
3-year
Depreciation Rate for Recovery Period
5-year 7-year 10-year 15-year
33.33
%
44.45
14.81
20.00
%
32.00
19.20
14.29 %
24.49
17.49
10.00 %
18.00
14.40
5.00
%
9.50
8.55
7.41 11.52
11.52
5.76
12.49
8.93
8.92
8.93
4.46
11.52
9.22
7.37
6.55
6.55
7.70
6.93
6.23
5.90
5.90
6.56
6.55
3.28
5.91
5.90
5.91
2.95
5.91
5.90
5.91
5.90
Asset Description How Gain is Taxed
2
3
Section 1245 property
Section 1250 property 2
1
MACRS (placed in service after 1986)
Ordinary to extent of depreciation
Ordinary to extent depreciation exceeds SL, then taxed at 25% maximum rate 3 to the extent of SL depreciation
ACRS (placed in service 1981–1986)
Ordinary to extent of depreciation Section 1245 property 1 (includes nonresidential real property if accelerated depreciation claimed)
Section 1250 property nonresidential real property if SL depreciation used and residential rental property)
2 (includes Ordinary to extent depreciation exceeds SL, then taxed at 25% maximum rate of SL depreciation
3 to the extent
Pre-ACRS (placed in service before 1981)
Section 1245 property 1
Section 1250 property rental property
Section 1250 property 2
2 —residential
— nonresidential real property
Ordinary to extent of depreciation
Ordinary to extent post-1975 depreciation exceeds SL, then taxed at 25% maximum rate 3 to the extent of SL depreciation
Ordinary to extent post-1969 depreciation exceeds SL, then taxed at 25% maximum rate 3
Section 1250 property 2 to the extent of SL depreciation
Low-Income Housing
Ordinary to the extent post-1975 depreciation exceeds SL, reduced by 1% for each full month held over 100, then taxed at 25% maximum rate 3 to the extent of SL depreciation
Section 197 Intangibles
Amortizable intangibles placed in Ordinary to the extent of amortization service after 8/10/93
Note: Depreciation includes regular depreciation, special depreciation and Section 179
1 expensing.
Includes all tangible personal property, single purpose agricultural and horticultural structures, certain other real property (other than a building and its structural components) that is used for storage and any real property to the extent of any Section 179 deduction taken.
Property that is not Section 1245 property. Includes most buildings and their structural components.
The 25% maximum rate on gain to the extent of SL depreciation claimed applies only to noncorporate taxpayers.
1
Placed In Service Cars
Trucks and
Vans
2013
First year (special depreciation applies) 2 .................
First year (no special depreciation) .........................
Second year ............................................................
Third year ................................................................
Fourth year and thereafter .......................................
$ 11,160
3,160
5,100
3,050
1,875
$ 11,360
3,360
5,400
3,250
1,975
2012
First year (special depreciation applies) ..................
$ 11,160
First year (no special depreciation) .........................
Second year ............................................................
Third year ................................................................
Fourth year and thereafter .......................................
3,160
5,100
3,050
1,875
$ 11,360
3,360
5,300
3,150
1,875
2011
First year (special depreciation applies) .................
First year (no special depreciation) ........................
Second year ...........................................................
Third year ...............................................................
Fourth year and thereafter ......................................
2010
First year (special depreciation applies) .................
$ 11,060
3,060
4,900
2,950
1,775
$ 11,260
3,260
5,200
3,150
1,875
First year (no special depreciation) ........................
Second year ...........................................................
Third year ...............................................................
Fourth year and thereafter ......................................
$ 11,060
3,060
4,900
2,950
1,775
$ 11,160
3,160
5,100
3,050
1,875
1 Amounts must be pro-rated if less than 100% business use.
2 The special (bonus) depreciation allowance is not available for business vehicles placed in service after 2013 unless legislation is enacted that extends the provision.
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MACRS G
R

MACRS General Rules ........................................... Page 2-1
General Depreciation System (GDS) ...................... Page 2-1
Alternative Depreciation System (ADS) .................. Page 2-2
Assigning the Recovery Period ............................... Page 2-2
Conventions ............................................................ Page 2-5
Computing Depreciation ......................................... Page 2-6
Placed In and Taken Out of Service ........................ Page 2-6
Alternative Minimum Tax (AMT) Depreciation ......... Page 2-8
Adjusted Current Earnings (ACE)—
C Corporations ..................................................... Page 2-9
Farm Property ......................................................... Page 2-9
Short Tax Years ..................................................... Page 2-10
Special (Bonus) Depreciation ............................... Page 2-12
Qualified Disaster Assistance Property ................. Page 2-14
General Asset Accounts ........................................ Page 2-14
Changes in an Asset’s Use ................................... Page 2-16 to alternative minimum taxable income. See Alternative Minimum
Tax (AMT) Depreciation on Page 2-8.
Assets are classified under MACRS. The classification generally determines the depreciation method, convention and recovery period. See MACRS Property Classification on Page 2-3.
G
D
S
(GDS)
Unless the alternative depreciation system (ADS) is required or elected, the general depreciation system (GDS) applies.
Three depreciation methods are available under the general depreciation system. For most property, other than nonresidential real property and residential rental property, the default (no election made) is the 200% declining balance method over the GDS recovery period.
Alternatively, taxpayers can elect either the:
1) 150% declining balance method over the GDS recovery period or
2) Straight-line method over the GDS recovery period.
See MACRS Depreciation Methods Available for Regular Tax below for details on the methods for specific assets.
The Modified Accelerated Cost Recovery System (MACRS) is used to depreciate most business, rental and investment property placed in service after 1986.
Under MACRS, compute depreciation by: [IRC §168(a)]
1) Applying an allowable depreciation method,
2) Assigning the asset the proper recovery period and
3) Using the appropriate convention (assumption about when property is placed in and taken out of service).
MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System
(ADS). The GDS is the method used for regular tax, unless the
ADS is used. The ADS can be elected for any asset. However, its use is mandatory in certain situations. See Alternative Depreciation
System (ADS) on Page 2-2.
 Note: For alternative minimum tax (AMT), depreciation is computed under different rules, often resulting in an adjustment
The election to use a depreciation method other than the default method is made the year the property is placed in service. Once an election is made to use a method for an item in a property class, the same method applies to all property in that class placed in service in the year of the election.
Exception: The election to use a different depreciation method is made on a property-by-property basis for nonresidential real and residential rental property.
Method
150% method
SL
ADS
How to Elect
Enter “150 DB” under column (f) in Part III of Form 4562.
Enter “S/L” under column (f) in Part III of Form 4562.
Complete Section C in Part III of Form 4562.
Property
Three-year, five-year, seven-year and 10-year property classes (except farm property).
• Farm property (except real property).
• 15-year and 20-year property.
• Nonresidential real property.
• Residential rental property.
• Qualified leasehold improvement property.
3
• Qualified restaurant property.
3
• Qualified retail improvement property.
3
• Trees or vines bearing fruit or nuts.
• 25-year (water utility) property.
No Election Made
200% declining balance over GDS recovery period.
150% declining balance over GDS recovery period.
Straight-line over GDS recovery period.
General Depreciation System (GDS)
Elective 150%
Declining Balance Method 1
150% declining balance over GDS recovery period.
N/A
Elective SL MACRS
Straight-line over GDS recovery period.
N/A
Alternative Depreciation
System (ADS) 2
Straight-line over ADS recovery period.
1
2
3
For property placed in service before 1999, elective 150% declining balance method used the ADS recovery periods.
See ADS Recovery Periods on Page 2-2.
Expired Provision Alert: This classification expired for property placed in service after 2013. Property that would been classified as such (if placed in service before
2014) is nonresidential real property if placed in service after 2013, unless this provision is extended—tax professionals should watch for developments. However, regardless of the recovery period assigned, this property is depreciated SL over its GDS (or, if applicable) ADS recovery period.
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Electing a slower depreciation method (either 150% DB or SL) results in smaller depreciation deductions for the early years in the recovery period than what would be available absent the election.
Deferring deductions may allow the taxpayer to use a net operating loss carryover or create passive income to offset passive losses. Electing 150% DB will also eliminate an AMT adjustment for those assets, since the same depreciation method will be used for regular tax and AMT.
Tax-exempt use property subject to a lease.
The ADS recovery period cannot be less than 125% of the lease term for any property leased under a leasing arrangement to a tax-exempt organization, governmental unit or foreign person or entity (other than a partnership).
A
D
S
(ADS)
Under the alternative depreciation system, assets are depreciated straight-line over their ADS recovery period.
The ADS method can be elected for any asset, but is mandatory in the following situations: [IRC §168(b)(2), 168(g)(1) and 280F(b)(1)]
1) Listed property with 50% or less qualified business use.
2) Tangible property used predominantly outside the U.S. during the year.
3) Tax-exempt use property.
4) Property financed by tax-exempt bonds.
5) Property used predominantly in a farming business if it is placed in service in a year an election not to apply the uniform capitalization rules to certain farming costs is in effect (see Farm
Property on Page 2-8).
6) Property imported from a foreign country for which an Executive
Order is in effect because the country maintains trade restrictions or engages in other discriminatory acts.
The recovery periods for most property generally are longer under
ADS than they are under GDS.
1
Property
Rent-to-own property
Automobiles and light duty trucks
Computers and peripheral equipment
High technology telephone station equipment installed on customer premises
High technology medical equipment
New York Liberty Zone leasehold improvement property
Personal property with no class life
Natural gas gathering lines
Single purpose agricultural and horticultural structures
Any tree or vine bearing fruit or nuts
Electric transmission property used in the transmission at 69 or more kilovolts of electricity
Recovery Period
4 years
5 years
5 years
5 years
5 years
9 years
12 years
14 years
15 years
20 years
2
Natural gas distribution lines
Qualified leasehold improvement property, qualified restaurant property or qualified retail improvement property
Nonresidential real property
Residential rental property
Section 1245 real property not listed in Revenue Procedure
87-56
Railroad grading and tunnel bore
30 years 2
35 years
40 years
40 years
40 years
40 years
50 years
2
3
1 This list is not all-inclusive. The ADS recovery periods for property not listed above
2 can be found in the tables in Revenue Procedure 87-56 (reproduced at Tab 12).
Applicable to property placed in service after April 11, 2005, the original use of which began after that date (but not applicable if under a binding contract or if construction began on a self-constructed asset before April 12, 2005).
3 39 years for property placed in service before 2014 .
2015
2-2 2014 Tax Year | Depreciation Quickfinder ® Handbook
A
R
p
The recovery period is the number of years over which an asset’s basis is recovered under MACRS. Different recovery periods are often assigned under GDS and ADS.
Property is classified under Code Section 168(e). That classification determines the GDS recovery period. See MACRS Property
Classification on Page 2-3.
Revenue Procedure 87-56 (reproduced at Tab 12) lists the recovery periods for many assets not specified in MACRS
Property Classification on Page 2-3. It also lists the recovery periods for assets used in specific activities.
Revenue Procedure 87-56 provides three lives for the assets listed:
• Class life.
This is the class life that was applicable for the property as of January 1, 1986, under former Section 167(m) and the Class Life
Asset Depreciation Range (CLADR) System, which was used before 1981. The class life is used to determine the recovery period for assets not specifically listed in Code Section 168 or in Revenue Procedure 87-56. However, for the assets listed in the Revenue Procedure, the recovery periods are specified, so class life is not needed for determining the recovery period.
• GDS recovery period.
• ADS recovery period.
Specific and nonspecific activities . Revenue Procedure 87-56 contains two tables of Class Lives and Recovery Periods :
• Specific Depreciable Assets Used in All Business Activities, Except as Noted lists assets used in all business activities.(Referred to as Table B-1 in IRS Publication 946.)
• Depreciable Assets Used in the Following Activities provides recovery periods for assets used in certain activities. (Referred to as Table B-2 in IRS Publication 946.)
Using the recovery period tables . To find an asset’s correct recovery period, look at both Table B-1 and Table B-2. Use the tables in the following order to determine the asset’s recovery period.
1) Table B-1. Check Table B-1 for a description of the property.
If it is described in Table B-1, also check Table B-2 to find the activity in which the property is being used. If the activity is described in Table B-2, read the text (if any) under the title to determine if the property is specifically included in that asset class. If it is, use the recovery period shown in the appropriate column of Table B-2. If the activity is not described in Table
B-2 or if the activity is described but the property either is not specifically included in or is specifically excluded from that asset class, use the property’s recovery period in Table B-1.
2) Table B-2.
If the property is not listed in Table B-1, check Table
B-2 to find the activity in which the property is being used. If the activity is listed, use the recovery period shown in the appropriate column following the description.
Continued on Page 2-4
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1
Classification Examples
3-year property • Tractor units for over-the-road use.
• Any race horse, regardless of age when placed in service.
3
• Any horse (other than a race horse) over 12 years old when placed in service.
• Qualified rent-to-own property.
4
5-year property • Automobiles, taxis, buses and trucks.
• Computers and peripheral equipment.
• Office machinery (such as typewriters, calculators and copiers).
• Property used in research and experimentation.
• Breeding cattle and dairy cattle.
• Appliances, carpets, furniture, etc., used in a residential rental real estate activity.
• Certain geothermal, solar and wind energy property.
7-year property • Office furniture and fixtures (such as desks, files and safes).
• Agricultural machinery and equipment.
6
2015
• Motorsports entertainment complex placed in service after October 22, 2004 and before 2014 .
• Property that does not have a class life and has not been designated by law as being in any other class.
• Any natural gas gathering line placed in service after April 11, 2005.
10-year property
• Vessels, barges, tugs and similar water transportation equipment.
• Single purpose agricultural or horticultural structure (see Tab 7).
• Any tree or vine bearing fruits or nuts.
7
• Qualified smart electric meters and qualified smart electric grid systems placed in service after October 3, 2008.
8
15-year property
• Certain improvements made directly to land or added to it (such as fences, roads and bridges).
• Retail motor fuels outlet (see Tab 7).
• Any municipal wastewater treatment plant.
• Qualified leasehold improvement property (see Tab 7) placed in service before 2014 .
7
• Qualified restaurant property (see Tab 7) placed in service before 2014 .
7
2015
• Qualified retail improvement property (see Tab 7) placed in service before 2014 .
7
• Initial clearing and grading land improvements for gas utility property placed in service after October 22, 2004.
• Electric transmission property (that is Section 1245 property) used in the transmission at 69 or more kilovolts of electricity placed in service after April 11, 2005.
• Any natural gas distribution line placed in service after April 11, 2005 and before 2011.
20-year property
25-year property 9
Residential rental property
Nonresidential real property 10
• Farm buildings (other than single purpose agricultural or horticultural structures).
• Municipal sewers not classified as 25-year property.
• Initial clearing and grading land improvements for electric utility transmission and distribution plants placed in service after October 22, 2004.
• Property that is an integral part of the gathering, treatment or commercial distribution of water, and that, without regard to this provision, would be 20-year property.
• Municipal sewers placed in service after June 12, 1996, other than property placed in service under a binding contract in effect at all times since June 9, 1996.
Any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental income for the tax year is from dwelling units. Note: Units in a hotel, motel or other establishment where more than half the units are used on a transient basis are not dwelling units (see Tab 7).
Section 1250 property that is neither residential rental property nor property with a class life of less than 27.5 years (see Tab 7). Examples include office buildings, stores or warehouses.
GDS
Depreciation
Method 2
200% 5
Declining balance
200% 5
Declining balance
200% 5
Declining balance
200% 5
Declining balance
150%
Declining balance
150%
Declining balance
GDS
Recovery
Period
Convention
3 years Half-year or mid-quarter
5 years
7 years
Half-year or mid-quarter
Half-year or mid-quarter
10 years Half-year or mid-quarter
15 years Half-year or mid-quarter
20 years Half-year or mid-quarter
Straight-line 25 years Half-year or mid-quarter
Straight-line 27.5 years Mid-month
Straight-line 39 years Mid-month
1 Expired Provision Alert: Several provisions expired for property placed in service after 2013. It’s possible these provisions will be extended beyond that date. Tax professionals should watch for developments.
2 Elective methods may be available. See MACRS Depreciation Methods Available for Regular Tax on Page 2-1.
4
3 Effective for race horses placed in service after December 31, 2008 and before January 1, 2014 . Outside of that date range, only race horses more than two years old when placed in service are 3-year property. [IRC §168(e)(3)(A)]
Five years for qualified rent-to-own property placed in service before August 6, 1997.
2015
5 If used in farming, must use 150% instead of 200% declining balance.
6 New farm equipment placed in service in 2009 was five-year property. Five-year treatment was unavailable for grain bins, cotton ginning assets, fences or other land improvements. [IRC §168(e)(3)(B)(vii)]
7 Must use straight-line method. [IRC §168(b)(3)(E) and (e)(3)(D)(ii)]
8 Must use 150% declining balance method. [IRC §168(b)(2)(C)]
9 20 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996.
10 31.5 years for property placed in service before May 13, 1993.
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Property not in either table. If the activity or the property is not included in either table, check the end of Table B-2 to find Certain
Property for Which Recovery Periods Assigned . This property generally has a recovery period of seven years for GDS or 12 years for ADS.
Example #1: GreenCo is a paper manufacturer. During the year, the company made substantial improvements to the land on which its paper plant is located.
To determine the proper recovery period for the improvements, first check
Table B-1, Specific Depreciable Assets Used in All Business Activities, Except as Noted . Here, land improvements are listed under Asset Class 00.3. Then check Table B-2, Depreciable Assets Used in the Following Activities . Here,
GreenCo’s business activity, paper manufacturing, is under Asset Class 26.1,
Manufacture of Pulp and Paper . The proper recovery period is the one under this asset class because it specifically includes land improvements. The land improvements have a seven-year GDS recovery period. If the company elects to use ADS, the recovery period is 13 years.
If only Table B-1 had been considered, Asset Class 00.3, Land Improvements would have been chosen and a recovery period of 15 years for GDS or 20 years for ADS incorrectly used.
Example #2: RubberCo produces rubber products. During the year, the company made substantial improvements to the land on which its rubber plant is located. To determine the proper recovery period for the improvements, first check Table B-1. Here, land improvements are under
Asset Class 00.3. Next, check Table B-2, where the company’s activity, producing rubber products, is listed under Asset Class 30.1, Manufacture of Rubber Products . However, the headings and descriptions under
Asset Class 30.1 do not include land improvements. Therefore, the proper recovery period to use is that under Asset Class 00.3. The land improvements have a 15-year GDS recovery period. If ADS is elected, the recovery period is 20 years.
Example #3: Pam Martin owns a retail clothing store. During the year, she purchased a desk and a cash register for use in her business. Table B-1 shows office furniture under Asset Class 00.11. Cash registers are not listed in any of the asset classes in Table B-1. In Table B-2, the business activity, retail store, is listed under Asset Class 57.0, Distributive Trades and Services , which includes assets used in wholesale and retail trade. This asset class does not specifically list office furniture or a cash register. Therefore, Asset Class 00.11 from Table B-1 is used for the desk. The desk has a seven-year GDS recovery period. If the ADS method is elected, the recovery period is 10 years. For the cash register, Asset Class 57.0 is used because cash registers are not listed in Table B-1 but are assets used in a retail business. The cash register has a five-year recovery period for GDS. If the ADS method is elected, the recovery period is nine years.
Asset Class 57.0 allows assets used in wholesale and retail trades and personal and professional services to be depreciated over a five-year GDS recovery period (nine-year for ADS).
1
Business Type
Personal Services
Professional Services
Retail Trade
Wholesale
Examples
Dry cleaners, beauty and barber shops, hotels and motels, photography studios and mortuaries.
Doctors, dentists, attorneys, accountants, engineers, architects and veterinarians.
Grocery and department stores, restaurants, cafes, coin-operated dispensing machines and retail stores.
Beverage distributors.
1 This is not an exhaustive list.
2-4 2014 Tax Year | Depreciation Quickfinder ® Handbook
The recovery periods for property used in a residential rental activity are summarized in the following table.
IRS Pub. 527
Recovery Period in Years
Assets GDS ADS
Computers and their peripheral equipment ....................... 5 ...................... 5
Office machinery, such as typewriters, calculators, copiers ......................................................... 5 ...................... 6
Automobiles ....................................................................... 5 ...................... 5
Light trucks ........................................................................ 5 ...................... 5
Appliances, such as stoves, refrigerators, etc. .................. 5 ......................9
Carpets .............................................................................. 5 ...................... 9
Furniture used in rental property ....................................... 5 ...................... 9
Office furniture and equipment (desks, file cabinets, etc.) ................................................................. 7 .................... 10
Any property that does not have a class life and that has not been designated by law as being in any other class ............................................................... 7 .................... 12
Roads .............................................................................. 15 .................... 20
Shrubbery ....................................................................... 15 .................... 20
Fences ............................................................................. 15 .................... 20
Residential rental property (buildings or structures, including mobile homes) and structural components such as furnaces, waterpipes, venting, etc. Additions and improvements (such as a new roof) have the same recovery period as the property to which the addition or improvement is made, determined as if the property were placed in service at the same time as the addition or improvement. ................................ 27.5 .................... 40
 Expired Provision Alert: For assets placed in service before
2014, special recovery periods applied to qualified Indian reservation property. This provision is not available for property placed in service after 2013 unless legislation is enacted to extend it. This discussion is included in the event that the shorter recovery periods are extended to 2014. If they are not extended, property that formerly was classified as qualified Indian reservation property and placed in service in 2014 is depreciated under the general MACRS rules.
The recovery periods for qualified property placed in service on an Indian reservation after 1993 and before 2014 are shorter than normal for some property classes. To be eligible for the shorter recovery periods, the property must be used predominantly in the active conduct of a trade or business or a rental real estate activity within an Indian reservation. [IRC §168(j)] 2015
Property Classification
Three-year property
Five-year property
Seven-year property
10-year property
Recovery Period
Two years
Three years
Four years
Six years
Depreciation Method
200% DB
200% DB
200% DB
200% DB
15-year property
20-year property
Nine years
12 years
150% DB
150% DB
Nonresidential real property 22 years SL
See Tab 4 for optional tables for computing depreciation for qualified Indian reservation property.
Replacement Page 1/2015

C
Under the half-year convention, all property placed in service or disposed of during a tax year is treated as placed in service or disposed of on the midpoint of that tax year [IRC §168(d)(4)].
Thus, half of a full year’s depreciation is taken both in the year the property is placed in service and in the year of disposition.
The half-year convention applies to all property except:
1) Residential rental and nonresidential real property and
2) Property subject to the mid-quarter convention (discussed below).
and a $23,000 Section 179 deduction
for the grinding machine
If more than 40% of the basis of property is placed in service in the last three months of the year, the mid-quarter convention applies to all property
(other than the
Excluded items listed below)
placed in service during the year. [IRC §168(d)
(3)]. Then, all property placed in service or disposed of during any quarter of a tax year is treated as placed in service, or disposed of, at the midpoint of that quarter.
Excluded items.
To determine if the mid-quarter convention applies, the following items are not counted:
1) Property depreciated under a method other than MACRS.
2) Residential rental property.
3) Nonresidential real property.
4) Property placed in service and disposed of in the same tax year.
5) Property expensed under Code Section 179.
Pass-through entities. As a general rule, the
40% test is applied at the partnership or S corporation level and not at the individual owner level.
However, if a pass-through entity is formed or used for the principal purpose of avoiding the mid-quarter convention or causing the mid-quarter convention to apply, anti-abuse rules apply. [Reg. §1.168(d)-1(b)(6)]
Effect of mid-quarter convention.
If the mid-quarter convention applies, property placed in service in the first half of the year receives more than a half-year’s worth of depreciation in the year placed in service while property placed in service in the last half of the year receives less than a half-year’s worth of depreciation (for example, property placed in service in the fourth quarter receives only 12.5% of a full year’s worth of depreciation).
Quarter
Placed in Service/
Disposed Of
First
Second
Third
Fourth
% of Full Year
Depreciation—Placed in
Service Year
87.5%
62.5
37.5
12.5
% of Full Year
Depreciation—
Disposition Year
12.5%
37.5
62.5
87.5
Using the Section 179 deduction to avoid the mid-quarter convention.
The Section 179 election can be used to avoid the mid-quarter convention by expensing property placed in service in the last quarter of the tax year. On the other hand, claiming a
Section 179 deduction for assets placed in service during the first three quarters increases fourth-quarter additions relative to the
Replacement Page 1/2015 total and may result in the application of the mid-quarter convention for any assets not expensed under Code Section 179. See the Section 179 Annual Limits table on Page 5-1.
Example: Norm is a calendar-year sole proprietor. He placed the following assets in service during 2014:
Date Description Cost
January ....................................... Polishing machine ........................
$477,000
December ................................... Grinding machine .........................
78,000
Total ...................................................................................................
$555,000
Norm claims a Section 179 deduction of $78,000 for the grinding machine and
$422,000 for the polishing machine for a total of $500,000 in 2014 .
For the 40% test (to determine if the mid-quarter convention applies) Norm counts only the $55,000 ( $477,000 – $422,000 expensed under Code Section
179) remaining basis in the polishing machine placed in service in January.
The amounts expensed under Code Section 179 are not considered. Thus, the mid-quarter convention does not apply to Norm in 2014 since 100% of the basis of property considered for the test was placed in service in the first quarter. The $55,000 remaining basis in the polishing machine is depreciated using the half-year convention.
Variation: Now assume that Norm claims a $477,000 Section 179 deduction for the polishing machine .
For the 40% test, he has placed $17,000 of assets in service in 2014: $5,000 ($30,000 – $25,000) in the first quarter and $12,000 in the fourth quarter. Since $12,000 exceeds $6,800 ($17,000 x 40%) the midquarter convention applies to the assets placed in service in 2014 .
.
The mid-month convention applies to residential rental and nonresidential real property. Property placed in service or disposed of during any month is considered placed in service or disposed of on the midpoint of that month. So, for the month the asset is placed in service or disposed of, a half-month of depreciation is taken.
9
10
7
8
11
12
4
5
6
1
2
3
Month Placed in
Service/Disposed of
% of Full Year
Depreciation—Placed in Service Year
95.83%
87.50
79.17
70.83
62.50
54.17
45.83
37.50
29.17
20.83
12.50
4.17
% of Full Year
Depreciation—
Disposition Year
4.17%
12.50
20.83
29.17
37.50
45.83
54.17
62.50
70.83
79.17
87.50
95.83
If property subject to the half-year convention is sold, the half-year convention also applies in the year of the sale. Thus, half a year’s depreciation is claimed in the year of disposition.
If the mid-quarter convention applied to property in the year placed in service, the property is treated as disposed of at the midpoint of the quarter in which the disposition
occurred. See the Mid-Quarter Convention Percentages table in
the previous column for the percentage of a full year’s depreciation allowed in the year of disposition.
2014 Tax Year | Depreciation Quickfinder ® Handbook 2-5

IRS Pub. 225 and Rev. Proc. 87-56
Recovery Period in Years
Assets
Agricultural structures (single purpose) ................
Airplanes (including helicopters) 1 ........................
Automobiles ..........................................................
Calculators and copiers ........................................
Cattle (dairy or breeding) ......................................
5
5
5
7
GDS
10
5
ADS
15
6
5
6
7
10 Communication equipment 2 .................................
Computer and peripheral equipment ....................
Cotton ginning assets ...........................................
Drainage facilities .................................................
Farm buildings 3 ....................................................
5
7
15
20
5
12
20
25
Farm machinery and equipment 4 .........................
Fences (agricultural) .............................................
Goats and sheep (breeding) .................................
Grain bins .............................................................
Hogs (breeding) ....................................................
Horses (age when placed in service)
• Breeding and working (12 years or less) ..........
• Breeding and working (more than 12 years) ....
• Racing horses 5 .................................................
Horticultural structures (single purpose) ..............
House trailers for farm laborers—mobile (has
wheels and a history of movement) ...................
House trailers for farm laborers—not mobile
(wheels have been removed and permanent
utilities and pipes are attached to it) ..................
Logging machinery and equipment 6 ...................
Nonresidential real property ................................
7
7
3
7
5
7
3
3
10
7
20
5
39 7
10
10
5
10
3
10
10
12
15
10
25
6
40
Office furniture, fixtures and equipment (not
calculators, copiers or typewriters) ....................
Paved lots ............................................................
Residential rental property ...................................
Tractor units (over-the-road) ................................
Trees or vines bearing fruit or nuts ......................
Truck (heavy duty, unloaded weight
13,000 lbs. or more) ..........................................
Truck (actual weight less than 13,000 lbs.) .........
Vineyard trellising ................................................
Water wells (for raising poultry and livestock) .....
7
15
27.5
3
10
7
15
5
5
10
20
40
4
20
6
5
10
20
1 Not including airplanes used in commercial or contract carrying of passengers.
2 Not including communication equipment listed in other classes.
3 Not including single purpose agricultural or horticultural structures.
4 New farm equipment placed in service in 2009 was five-year (rather than sevenyear) property. Five-year treatment excluded grain bins, cotton ginning assets, fences or other land improvements.
5 For race horses placed in service after December 31, 2008 and before
January 1, 2014 . Outside of that date range, race horses more than two years old when placed in service are three-year property, and race horses two years old or younger are seven-year property.
2015
6 Used by logging and sawmill operators for cutting timber.
7 For property placed in service after May 12, 1993; for property placed in service before May 13, 1993, the recovery period is 31.5 years.
2-10 2014 Tax Year | Depreciation Quickfinder ® Handbook
Example #2: Green Farm, Inc. is actively involved in agricultural activities.
In 2014, Green Farm purchases a 10-acre piece of land that includes a farm house, hog barns, a general purpose machine shed and a grain bin. Green
Farm also purchases the hog livestock on site. In considering how to depreciate the personal and real property purchased, all the assets purchased are considered farm assets, subject to the 150% declining balance method, and assigned the following recovery periods:
• The farm house (Asset Class 01.3) is used to house the farm manager and is depreciated over 20 years.
• The machine shed (Asset Class 01.3) is a general purpose farm building subject to 20-year life.
• The hog barns (Asset Class 01.4) qualify as single purpose agricultural buildings depreciated over 10 years.
• The machinery and equipment (Asset Class 01.1) inside the hog barns are seven-year property.
• The grain bin (Asset Class 01.1) is seven-year property.
• The breeding hogs (Asset Class 01.23) qualify as three-year property.
Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than two years: (Notice 2013-18)
• Almonds
• Apples
• Apricots
• Avocados
• Blueberries
• Cherries
• Chestnuts
• Coffee beans
• Currants
• Dates
• Figs
• Grapefruit
• Grapes
• Guavas
• Kiwifruit
• Kumquats
• Lemons
• Limes
• Macadamia nuts
• Mangoes
• Nectarines
• Olives
• Oranges
• Peaches
• Pears
• Pecans
• Persimmons
• Pistachio nuts
• Plums
• Pomegranates
• Prunes
• Tangelos
• Tangerines
• Tangors
• Walnuts
S
t
y
The optional MACRS depreciation tables (see Tab 4) assume that the tax year property is placed in service and all subsequent tax years in the recovery period are full 12-month years. When property is placed in service or subject to depreciation deductions during a short tax year, special calculations apply. (Rev. Proc. 89-15)
U Caution: The optional MACRS depreciation tables cannot be used to compute depreciation if at any time during the recovery period there is a short tax year.
The tax year does not begin until the taxpayer engages in a trade or business. For employee business expense purposes, the tax year can include any period during which the person is engaged in a trade or business as an employee, including periods before assets are placed in service.
Example: On July 1, 2014, ABC Corp. expanded its sales department and required employees to furnish their own auto as a condition of employment. Bill has been an employee of ABC for three years; Curt and David are new hires.
Curt previously worked for five years for a similar business; David recently graduated from college, and this is his first job. All three placed an auto in service on July 1 as a result of ABC’s requirement.
Bill and Curt do not have a short tax year for the auto placed in service on July 1 because they are considered to have been engaged in a trade or business for the entire year. Conversely, David has a short tax year beginning with his employment on July 1.
Depreciation in a short year begins on the placed-in-service date determined under the applicable convention.
Replacement Page 1/2015

For the tax years after the first short year, depreciation may be computed using either the simplified method or the allocation method (Rev. Proc. 89-15). The method chosen must be consistently used until the tax year that a switch to the MACRS straight-line (SL) method is required because it produces a larger depreciation deduction. Usually, both methods produce the same depreciation allowance.
Simplified method.
Calculate depreciation for a later 12-month year in the recovery period by multiplying the adjusted basis of the property at the beginning of the year by the applicable depreciation rate. See Optional Tables Not Used on Page 2-6 for the applicable rates.
Allocation method.
Calculate depreciation for each later tax year by allocating to that year the depreciation attributable to the parts of the recovery years that fall within that year. For each recovery year included, multiply the depreciation attributable to that recovery year by a fraction. The fraction’s numerator is the number of months (including parts of a month) that are included in both the tax year and the recovery year. The denominator is 12. The allowable depreciation for the tax year is the sum of the depreciation figured for each recovery year.
Example #1: Mary Jones forms a proprietorship that has a short tax year beginning March 15 and ending December 31. She is treated as having a
10-month tax year and, under the half-year convention, calculates a $167
($1,000 × 40% × 5 ÷ 12) depreciation allowance for year 1 on a $1,000 asset with a five-year recovery period. If Mary uses the simplified method for computing depreciation in the following years, her depreciation in years 2 and 3 will be as follows:
Year Depreciation Allowance
2............................................. ($1,000 – $167) × 40% = $333
3............................................. ($1,000 – $167 – $333) × 40% = $200
Example #2: Assume the same facts as in Example #1, except that the allocation method is used to compute the depreciation in years after the short year. For the second year, a two-part calculation is required. Seven months of depreciation is calculated using the method applicable to the first short-year calculation, and five months of depreciation is computed using the adjusted basis of $600 ($1,000 original cost less $400 depreciation allowance claimed in the first 12 months). The calculations for the first three years under this method are as follows:
Year Depreciation Allowance
1........... 40% × $1,000 × 5/ 12 = $167
2........... (40% × $1,000 × 7/ 12 ) + (40% × $600 × 5/ 12 ) = $333
3........... (40% × $600 × 7/ 12 ) + (40% × $360 × 5/ 12 ) = $200
S
(B
) D
 Expired Provision Alert: For qualified assets placed in service before 2014, special depreciation was available. With the exception of Long Production Period Property and Aircraft on Page 2-13, special depreciation is not available for property placed in service after 2013 unless legislation is enacted to extend it. This discussion is included in the event that special depreciation is extended to 2014.
The special depreciation allowance for 2013 generally equals
50% of the property’s basis [IRC §168(k)(1)(A)]. See the
Special
Depreciation Percentages table in the next column for percent-
ages for other years.
2014
2-12 2014 Tax Year | Depreciation Quickfinder ® Handbook
To be eligible for the special (bonus) depreciation allowance, an asset must pass four tests: [IRC §168(k)(2)(A)]
1) It must be qualified property. See Qualified Property below.
2) It must be new (see Original Use on Page 2-13).
3) It must be acquired by purchase (a) after 2007 with no written binding contract to acquire in effect at any time before 2008 or
(b) pursuant to a written binding contract entered into during
2008– 2013 . For self-constructed property this test is met if the taxpayer begins manufacturing, constructing or producing the property during 2008– 2013 . 2014
4) It must be placed in service before 2014 . Exception: See Long
Production Period Property and Aircraft on Page 2-13 for the extended placed in service date for certain assets.
2015
Date Qualifying Property
Placed in Service
Before 2008
1/1/08–9/8/10
9/9/10–12/31/11 1, 2
2012 – 2014
After 2014 3
Special Depreciation
Allowance Percentage
0%
50%
100%
50%
0%
1 Must be acquired and placed in service during this period to qualify for 100% special depreciation. For this test, property is acquired when the taxpayer pays or incurs the cost of the property. (Rev. Proc. 2011-26)
2 Certain long production period property and aircraft qualify for 100% special depreciation allowance if placed in service 9/9/10 – 12/31/12.
3 Certain long production period property and aircraft qualify for 50% special depreciation allowance if placed in service in 2014 . See Long Production Period
Property and Aircraft on Page 2-13.
2015
Determine the special (bonus) depreciation allowance without any pro-ration based on when the property was placed in service or for short tax years. Property placed in service on the last day of the tax year is eligible for the full special (bonus) depreciation amount. The special (bonus) depreciation allowance is an additional deduction computed after any Section 179 deduction
(if applicable) and before regular MACRS depreciation is calculated.
To qualify for the special (bonus) depreciation allowance, an asset must be one of the following: [IRC §168(k)(2)]
1) MACRS asset with a recovery period of 20 years or less,
2) Depreciable computer software other than software amortizable under Code Section 197 (for example, off-the-shelf software),
3) Water utility property defined in Code Section 168(e)(5) or
4) Qualified leasehold improvement property (see Qualified leasehold improvement property on Page 2-13).
Qualified property does not include:
1) Property placed in service and disposed of in the same tax year.
2) Property converted from business use to personal use in the same tax year it is acquired. [Reg. §1.168(k)-1(f)(6)]
3) Property that must be depreciated using the Alternative Depreciation System (ADS). This includes listed property used 50% or less for business.
4) Property for which taxpayer elected not to claim any special depreciation allowance.
Replacement Page 1/2015

Qualified leasehold improvement property. A leasehold improvement qualifies for special depreciation if it meets four tests:
[IRC §168(k)(3)]
1) The improvement is to an interior portion of a building.
2) The building is nonresidential real property.
3) The improvement was made pursuant to a lease by the lessee, sub-lessee or the lessor (landlord) to property to be occupied exclusively by the lessee or sub-lessee.
4) The improvement is placed in service more than three years after the date the building was first placed in service.
The following improvements are not qualified leasehold improvement property:
1) The enlargement of a building.
2) An elevator or escalator.
3) Any structural component benefiting a common area.
4) The internal structural framework of a building.
IRS Opinion: Heating, ventilation and air conditioning units installed on the exterior of a building or on its roof are not qualified leasehold improvement property since they are not installed to the interior of the building. (CCA
201310028)
U Caution: Leases between related parties do not qualify. Related parties include an individual and his or her spouse, children, grandchildren, parents, grandparents and siblings. They also include an individual and certain entities (for example, corporations) if the individual owns (directly or indirectly) 80% or more of the entity’s value.
N Observation: Qualified restaurant property and qualified retail improvement property (neither of which is eligible for special depreciation on its own) that also fall within the definition of qualified leasehold improvement property are eligible for special depreciation. (Rev. Proc. 2011-26)
To qualify for the special (bonus) depreciation allowance, the asset must generally be new, rather than pre-owned (that is, original use must commence with the taxpayer) [IRC §168(k)(2); Reg.
§1.168(k)-1(b)(3)]. However:
• New property acquired after December 31, 2007 for personal use and subsequently converted to business use meets the original use requirement.
2015
• Capital expenditures to recondition or rebuild acquired or owned property satisfy the original use requirement.
• Assets that are reconditioned or rebuilt before the taxpayer buys them generally don’t meet the original use test, but property containing used parts is not treated as reconditioned or rebuilt if the cost of the used parts is 20% or less of the property’s total cost.
• Assets placed in service after December 31, 2007 by a person and then sold to the taxpayer for leaseback to that person within three months after being placed in service will be treated as a new asset placed in service by the taxpayer on a date not earlier than the date it is used first by the lessee under the leaseback arrangement.
2014
Example: During 2013 , Bobcat Company bought a used machine for $20,000 and spent $5,000 to recondition it. The $20,000 purchase price is ineligible for the special (bonus) depreciation allowance. The $5,000 additional cost to recondition the machine is eligible for the special (bonus) depreciation allowance, assuming all other requirements are also met.
2016
Qualified property includes long production period property and certain noncommercial aircraft placed in service before 2015 .
Long production period property.
The property must meet the following requirements: [IRC §168(k)(2)(B)]
1) It has a recovery period of at least 10 years or is tangible personal property used in the trade or business of transporting people or property.
2) It is subject to the Section 263A uniform capitalization rules.
3) It has an estimated production period exceeding one year and an estimated production cost exceeding $1,000,000.
Noncommercial aircraft. The aircraft must (1) not be used in the trade or business of transporting people or property other than for agricultural or firefighting purposes, (2) be purchased and at the time of contract for purchase, the purchaser makes a nonrefundable deposit of 10% of the cost (or $100,000, if less) and (3) have an estimated production period exceeding four months and cost more than $200,000. [IRC §168(k)(2)(C)]
U Caution: Long production period property that otherwise qualifies for special depreciation and that is placed in service in 2014 qualifies for 50% special depreciation only to the extent of adjusted basis attributable to manufacture, construction or production before
2014 . [IRC §168(k)(2)(B)(ii)]
2015
A taxpayer can elect not to claim special depreciation for any class of property for any tax year [IRC §168(k)(2)(D); Reg. §1.168(k)-
1(e)]. The election not to claim special depreciation must be made for all additions within an entire class placed in service for the tax year.
The election out of special depreciation is made by attaching a statement similar to that below to the tax return for the year it is to be effective. Generally, it must be made by the due date, including extensions, of the tax return for the tax year in which the qualified property is placed in service.
Election Out of Special Depreciation
Taxpayer elects under Internal Revenue Code Section 168(k)(2)(D)(iii) to not claim the additional first-year bonus depreciation deduction (the special depreciation allowance) for the following classes of property placed in service during the tax year ended [year-end]: [list property classes for which election is made].
Replacement Page 1/2015 2014 Tax Year | Depreciation Quickfinder ® Handbook 2-13

Corporations may forego the special (bonus) depreciation allowance and instead elect to claim additional research or minimum tax credits. [IRC §168(k)(4)]
A corporation making the election foregoes the special (bonus) depreciation deductions and instead increases the limit on the use of research credits or minimum tax credits. The increases in the allowable credits are treated as refundable. The depreciation for qualified property is calculated for both regular tax and AMT purposes using the straight-line method in place of the method that would otherwise be used.
and 2014 2015
This provision applies to years ending, and property placed in service, after March 31, 2008 and before 2010 (2011 for certain long-lived assets). The election to forego the special depreciation allowance and instead increase the limit on certain credits is also available for assets placed in service in 2011, 2012 , and
2013 (2011– 2014 for long production period property and certain aircraft) [IRC §168(k)(4)(D)]. The election can be made for Round
Two property , or Round Three property , which is property eligible for the special depreciation allowance solely because it meets the requirements under the extension of the special depreciation allowance deduction for certain property placed in service after
2010 (Round Two) , or 2012 (Round Three). However, corporations that have already made this election for an earlier year can elect to not apply the election to Round Two , or Round Three property.
Also, for Round Two , or Round Three property, the limit on unused research credits cannot be increased by making this election.
See Rev. Proc. 2008-65, Rev. Proc. 2009-16 and Rev. Proc. 2009-33 for guidance on making the election.
or Round Four property
A 50% special (bonus) depreciation allowance applies to certain reuse and recycling property placed in service after August 31,
2008 [IRC §168(m)], cellulosic biofuel plant property placed in service after October 3, 2008 and before January 3, 2013 and second generation biofuel plant property placed in service after
January 2, 2013 and before 2014 . [IRC §168(l)] 2015
 Note: These provisions are separate from the special (bonus) depreciation allowance under Code Section 168(k). Property qualifying under Code Section 168(k) is not eligible for the special depreciation allowed under Code Sections 168(l) and 168(m).
Qualified reuse and recycling property is any machinery and equipment (including software to operate the equipment but not buildings or real estate) which is used exclusively to collect, distribute or recycle qualified reuse and recyclable materials such as:
• Scrap plastic, glass, textiles, rubber or packaging.
• Recovered fiber.
• Scrap ferrous and nonferrous metals or electronic scrap (such as cathode ray tubes, flat panel screens, similar video display devices and central processing units).
Qualified cellulosic biofuel plant property is property used to make cellulosic biofuel (any liquid fuel), including ethanol from cellulose, in the manner prescribed in Code Section 168(l).
Second generation biofuel is any liquid fuel derived by or from qualified feed stocks. [IRC
§40(b)(6)(E)]
Q
D
A
p
An additional 50% special (bonus) depreciation allowance was available for qualified disaster assistance property placed in service after 2007 in federally declared disaster areas for disasters declared after 2007 and occurring before 2010. [IRC §168(n)]
Qualified disaster assistance property is property used in an active trade or business that is:
1) MACRS property with a recovery period of 20 years or less,
2) Computer software,
3) Water utility property,
4) Qualified leasehold improvement property,
5) Nonresidential real property or
6) Residential rental property.
Qualified disaster assistance property must also meet the following requirements:
1) Substantially all of the property’s use must be in a federally declared disaster area.
2) The property must replace or rehabilitate property that was damaged or destroyed.
3) Its first use in the disaster area must begin with the taxpayer.
4) It must be acquired by the taxpayer by purchase on or after the disaster date, but only if no written binding contract for the acquisition was in effect before that date.
5) It must be placed in service by the taxpayer on or before the last day of the third calendar year following the disaster date
(fourth calendar year in the case of nonresidential real property and residential rental property).
, or 2013 (Round Four)
Any special depreciation taken for qualified disaster assistance property must be recaptured (taken back into income) if the property ceases to be qualified disaster assistance property. Rules similar to those for when property ceases to be Section 179 property
(see Section 179 Recapture on Page 5-9) apply. [IRC §168(n)(4)]
N Observation: To be qualified disaster assistance property, substantially all of the property’s use must be in the taxpayer’s trade or business in the disaster area. A similar rule applied for taking special depreciation on property placed in service in the Gulf
Opportunity (GO) Zone after Hurricane Katrina. The IRS ruled that if more than 20% of the property’s use was either (1) outside the
GO Zone or (2) not in the active conduct of the taxpayer’s trade or business in the GO Zone, substantially all of the property’s use wasn’t for business in the GO Zone. Then, any special depreciation deduction had to be recaptured. The recaptured amount was the total depreciation claimed (including special depreciation) for the property for the years before the recapture year minus the total depreciation that would have been allowable for those years had the special depreciation not been claimed (regardless of whether such excess reduced the taxpayer’s tax liability) (Notice 2006-77).
Presumably, similar rules will apply to recapturing special depreciation taken on qualified disaster assistance property.
G
A
A
In August 2014, the IRS issued a final regulation on general asset accounts, applicable to tax years beginning after 2013 [Reg.
§1.168(i), as issued in TD 9689]. This section covers the final regulation. See Transition Rules on Page 2-16 for rules for earlier years.
2-14 2014 Tax Year | Depreciation Quickfinder ® Handbook Replacement Page 1/2015

Regular Tax
Property Class
General Depreciation System
No election made SL Election
(if elected, also use for AMT)
Alternative Depreciation
System 1
(if elected or required,
also use for AMT)
Alternative Minimum Tax 1
3-year, 5-year, 7-year and
10-year (Nonfarm)
3-year, 5-year, 7-year and
10-year (Farm Property) 4, 5
15-year 5
20-year
Residential Rental
Real Property
Nonresidential Real Property 6
200% DB
GDS recovery period
Tables 1–4
150% DB
GDS recovery period
Tables 1–4
150% DB
15 years
Table 5
150% DB
20 years
Table 6
SL
27.5 years
Table 7
SL
39 years
Table 9
2, 3
SL
GDS recovery period
Tables 15–19
SL
GDS recovery period
Tables 15–19
SL
ADS recovery period
Tables 15–19
SL
ADS recovery period
Tables 15–19
SL
15 years
Table 5
SL
20 years
Table 6
N/A
N/A
SL
ADS recovery period
Tables 15–19
SL
ADS recovery period
Tables 15–19
SL
40 years
Table 20
SL
40 years
Table 20
150% DB
GDS recovery period
Tables 1–4
150% DB
GDS recovery period
Tables 1–4
If Section 1250 property,
SL
15 years
If Section 1245 property,
150% DB
15 years
Table 5
If Section 1250 property,
SL
20 years
If Section 1245 property,
150% DB
20 years
Table 6
SL
27.5 years
Table 7
SL
39 years
Table 9
3
3-year, 5-year, 7-year and
10-year (Nonfarm)
3-year, 5-year, 7-year and
10-year (Farm Property placed in service after 1988)
15-year
20-year
4, 5
200% DB
GDS recovery period
Tables 1–4
150% DB
GDS recovery period
Tables 1–4
150% DB
15 years
Table 5
150% DB
20 years
Table 6
SL
GDS recovery period
Tables 15–19
SL
GDS recovery period
Tables 15–19
SL
15 years
Table 5
SL
20 years
Table 6
7
7
7
7
SL
ADS recovery period
Tables 15–19
SL
ADS recovery period
Tables 15–19
SL
ADS recovery period
Tables 15–19
SL
ADS recovery period
Tables 15–19
150% DB
ADS recovery period
Tables 10–14
150% DB
ADS recovery period
Tables 10–14
SL
ADS recovery period
Tables 15–19
SL
ADS recovery period
Tables 15–19
Residential Rental Real
Property
Nonresidential Real Property
(placed in service after 1986 and before May 13, 1993)
SL
27.5 years
Table 7
SL
31.5 years
Table 8
N/A
N/A
SL
40 years
Table 20
SL
40 years
Table 20
SL
40 years
Table 20
SL
40 years
Table 20
Nonresidential Real Property
(placed in service after May 12,
1993 and before 1999)
SL
39 years
Table 9
N/A
2014
SL
40 years
Table 20
2015
SL
40 years
Table 20
1 Can be elected for any asset, if not already required. [IRC §168(b)(2)(D) and (g)(1)(E)]
2 Special (bonus) depreciation is available for qualified property placed in service during 2008– 2013 ( 2014 for certain long production period property and aircraft) [IRC
§168(k)]. See Special (Bonus) Depreciation on Page 2-12 and Tables 21–25 .
3 Certain classes of qualified Indian reservation property placed in service during 1994– 2013 have a shorter recovery period than the one normally assigned to that class
[IRC §168(j)]. See Indian Reservation Property on Page 2-4 and Tables 26–29 .
4 ADS method is required for farm assets when an election to not apply the uniform capitalization rules is in effect. [IRC §263A(e)(2)]
5 Trees and vines bearing fruit or nuts and placed in service after 1988 are depreciated SL over 10 years for regular tax and AMT. [IRC §168(b)(3)(E) and (e)(3)(D)(ii)]
6 Qualified leasehold improvement property and qualified restaurant property placed in service after 10/22/04 and before 2014 , and qualified retail improvement property placed in service during 2009– 2013 , are depreciated using SL over 15 years for regular tax and AMT and 39 years for ADS [IRC §168(b)(3), (e)(3)(E) and (g)(3)(B)]. See
Leasehold Improvements on Page 7-9 and ADS Recovery Periods on Page 2-2.
7 Use the ADS recovery period for AMT. [IRC §56(a)(1)]
4-2 2014 Tax Year | Depreciation Quickfinder ® Handbook Replacement Page 1/2015

•
200% Declining Balance
2015
Regular tax depreciation for personal property with three-year recovery period
[includes all racehorses (placed in service after 2008 and before 2014 ), racehorses over two years old (placed in service before 2009 and after 2013 ), other horses more than 12 years old, qualified rent-to-own property, tractors for over-the-road use, qualified Indian reservation property that would otherwise have a 5-year recovery period and assets used in certain activities].
For property placed in service after 1986
150% Declining Balance
• Regular tax depreciation for three-year assets used in a farming business.
• AMT depreciation for property with three-year recovery period placed in service after 1998.
• Can be elected for regular tax.
2014
Year
Half-Year
Convention
1.....................33.33%
2..................... 44.45
3..................... 14.81
4....................... 7.41
1
58.33%
27.78
12.35
1.54
Mid-Quarter Convention—
Quarter in Which Acquired
2
41.67%
38.89
14.14
5.30
3
25.00%
50.00
16.67
8.33
4
8.33%
61.11
20.37
10.19
Year
Half-Year
Convention
1..................... 25.00%
2......................37.50
3......................25.00
4......................12.50
1
43.75%
28.13
25.00
3.12
Mid-Quarter Convention—
Quarter in Which Acquired
3
18.75%
40.63
25.00
15.62
These percentages incorporate the switch from declining-balance (DB) to straight-line (SL) method when SL yields a larger deduction.
2
31.25%
34.38
25.00
9.37
4
6.25%
46.88
25.00
21.87
Note: For early disposition, multiply the depreciation obtained from these tables by ½ if half-year convention applied. For a disposition of property under the mid-quarter convention, see Convention in Year of Disposition on Page 2-5.
For property placed in service after 1986
200% Declining Balance
• Regular tax depreciation for personal property with five-year recovery period
(includes autos, computers, typewriters, copiers and assets used in certain activities).
150% Declining Balance
• Regular tax depreciation for five-year assets used in a farming business.
• AMT depreciation for property with five-year recovery period placed in service after 1998.
• Can be elected for regular tax.
Year
Half-Year
Convention
Mid-Quarter Convention—
Quarter in Which Acquired
Year
Half-Year
Convention
Mid-Quarter Convention—
Quarter in Which Acquired
1.....................20.00%
2..................... 32.00
3..................... 19.20
4......................11.52
1
35.00%
26.00
15.60
2
25.00%
30.00
18.00
3
15.00%
34.00
20.40
4
5.00%
38.00
22.80
1......................15.00%
2......................25.50
3......................17.85
4......................16.66
1
26.25%
22.13
16.52
5......................11.52
6....................... 5.76
11.01
11.01
11.37
11.37
12.24
11.30
13.68
10.94
5......................16.66
6........................8.33
16.52
16.52
1.38
4.26
7.06
9.58
2.06
These percentages incorporate the switch from declining-balance (DB) to straight-line (SL) method when SL yields a larger deduction.
2
18.75%
24.38
17.06
16.76
16.76
6.29
3
11.25%
26.63
18.64
16.56
16.57
10.35
4
3.75%
28.88
20.21
16.40
16.41
14.35
Note: For early disposition, multiply the depreciation obtained from these tables by ½ if half-year convention applied. For a disposition of property under the mid-quarter convention, see Convention in Year of Disposition on Page 2-5.
For property placed in service after 1986
200% Declining Balance
• Regular tax depreciation for personal property with seven-year recovery period
(includes office furniture and fixtures, horses not eligible for a three-year recovery period and assets used in certain activities).
150% Declining Balance
• Regular tax depreciation for seven-year assets used in a farming business.
• AMT depreciation for property with seven-year recovery period placed in service after 1998.
• Can be elected for regular tax.
Year
Half-Year
Convention
1..................... 14.29%
2......................24.49
3......................17.49
4......................12.49
5........................8.93
6........................8.92
7........................8.93
8........................4.46
1
25.00%
21.43
15.31
10.93
8.75
8.74
8.75
1.09
Mid-Quarter Convention—
Quarter in Which Acquired
2
17.85%
23.47
16.76
11.97
8.87
8.87
8.87
3.34
3
10.71%
25.51
18.22
13.02
9.30
8.85
8.86
5.53
4
3.57%
27.55
19.68
14.06
10.04
8.73
8.73
7.64
Year
Half-Year
Convention
1......................10.71%
2......................19.13
3......................15.03
4......................12.25
5......................12.25
6......................12.25
7......................12.25
8........................6.13
1
18.75%
17.41
13.68
12.16
12.16
12.16
12.16
1.52
Mid-Quarter Convention—
Quarter in Which Acquired
3
8.04%
19.71
15.48
12.27
12.28
12.27
12.28
7.67
These percentages incorporate the switch from declining-balance (DB) to straight-line (SL) method when SL yields a larger deduction.
2
13.39%
18.56
14.58
12.22
12.22
12.22
12.23
4.58
4
2.68%
20.85
16.39
12.87
12.18
12.18
12.19
10.66
Note: For early disposition, multiply the depreciation obtained from these tables by ½ if half-year convention applied. For a disposition of property under the mid-quarter convention, see Convention in Year of Disposition on Page 2-5.
Replacement Page 1/2015 2014 Tax Year | Depreciation Quickfinder ® Handbook 4-3

For property placed in service after 1986
200% Declining Balance
• Regular tax depreciation for personal property with 10-year recovery period
(includes boats not used for transportation and assets used in certain activities).
150% Declining Balance
• Regular tax depreciation for 10-year assets used in a farming business (including single-purpose farm structures).
• AMT depreciation for personal property with 10-year recovery period placed in service after 1998.
• Can be elected for regular tax.
Year
Half-Year
Convention
Year
Half-Year
Convention
1......................10.00%
2......................18.00
3......................14.40
4......................11.52
5........................9.22
1
17.50%
16.50
13.20
10.56
8.45
Mid-Quarter Convention—
Quarter in Which Acquired
2
12.50%
17.50
14.00
11.20
8.96
3
7.50%
18.50
14.80
11.84
9.47
4
2.50%
19.50
15.60
12.48
9.98
1........................7.50%
2......................13.88
3...................... 11.79
4......................10.02
5........................8.74
1
13.13%
13.03
11.08
9.41
8.71
Mid-Quarter Convention—
Quarter in Which Acquired
2
9.38%
13.59
11.55
9.82
8.73
3
5.63%
14.16
12.03
10.23
8.75
4
1.88%
14.72
12.51
10.63
9.04
6........................7.37
7........................6.55
8........................6.55
9........................6.56
10......................6.55
6.76
6.55
6.55
6.56
6.55
7.17
6.55
6.55
6.56
6.55
7.58
6.55
6.55
6.56
6.55
7.99
6.55
6.55
6.56
6.55
6........................8.74
7........................8.74
8........................8.74
9........................8.74
10......................8.74
8.71
8.71
8.71
8.71
8.71
8.73
8.73
8.73
8.73
8.73
8.75
8.75
8.74
8.75
8.74
8.72
8.72
8.72
8.72
8.71
11 ......................3.28
0.82
2.46
4.10
5.74
11 ......................4.37
1.09
These percentages incorporate the switch from declining-balance (DB) to straight-line (SL) method when SL yields a larger deduction.
3.28
5.47
7.63
Note: For early disposition, multiply the depreciation obtained from these tables by ½ if half-year convention applied. For a disposition of property under the mid-quarter convention, see Convention in Year of Disposition on Page 2-5.
For property placed in service after 1986
150% Declining Balance
• Regular tax depreciation for property with a 15-year recovery period, including land improvements (both Section 1245 and 1250 property) and assets used in certain activities.
Straight-Line
2015
• Regular tax depreciation for qualified leasehold improvement property and qualified restaurant property placed in service after 10/22/04 and before 2014 , and qualified retail improvement property placed in service during 2009– 2013 .
• AMT depreciation for 15-year property placed in service after 1998 that is Section
1250 property.
• ADS depreciation for assets with 15-year ADS life.
• Can be elected for regular tax and AMT.
Year
Half-Year
Convention
Year
Half-Year
Convention
1.......................5.00%
2.......................9.50
3.......................8.55
4.......................7.70
5.......................6.93
1
8.75%
9.13
8.21
7.39
6.65
Mid-Quarter Convention—
Quarter in Which Acquired
2
6.25%
9.38
8.44
7.59
6.83
3
3.75%
9.63
8.66
7.80
7.02
4
1.25%
9.88
8.89
8.00
7.20
1....................... 3.33%
2........................6.67
3........................6.67
4........................6.67
5........................6.67
1
5.83%
6.67
6.67
6.67
6.67
Mid-Quarter Convention—
Quarter in Which Acquired
2
4.17%
6.67
6.67
6.67
6.67
3
2.50%
6.67
6.67
6.67
6.67
4
0.83%
6.67
6.67
6.67
6.67
2014
6.......................6.23
7.......................5.90
8.......................5.90
9.......................5.91
10.....................5.90
11 .....................5.91
12.....................5.90
13.....................5.91
14.....................5.90
15.....................5.91
5.90
5.91
5.90
5.91
5.90
5.99
5.90
5.91
5.90
5.91
5.91
5.90
5.91
5.90
5.91
6.15
5.91
5.90
5.91
5.90
5.91
5.90
5.91
5.90
5.91
6.31
5.90
5.90
5.91
5.90
5.90
5.91
5.90
5.91
5.90
6.48
5.90
5.90
5.90
5.91
6........................6.67
7........................6.67
8........................6.66
9........................6.67
10......................6.66
11 ......................6.67
12......................6.66
13......................6.67
14......................6.66
15......................6.67
6.67
6.66
6.67
6.66
6.67
6.67
6.67
6.66
6.67
6.66
6.66
6.67
6.66
6.67
6.66
6.67
6.66
6.67
6.66
6.67
6.66
6.67
6.66
6.67
6.66
6.67
6.66
6.67
6.66
6.67
6.67
6.66
6.67
6.66
6.67
6.67
6.67
6.66
6.67
6.66
16.....................2.95
0.74
2.21
3.69
5.17
These percentages incorporate the switch from declining-balance (DB) to straightline (SL) method when SL yields a larger deduction.
16......................3.33
0.83
2.50
4.17
5.83
Note: For early disposition, multiply the depreciation obtained from these tables by ½ if half-year convention applied. For a disposition of property under the mid-quarter convention, see Convention in Year of Disposition on Page 2-5.
4-4 2014 Tax Year | Depreciation Quickfinder ® Handbook Replacement Page 1/2015

For property placed in service after 1986
• Alternative Depreciation System for residential rental or nonresidential real property.
• AMT depreciation for residential rental or nonresidential real property placed in service before 1999.
• Can be elected for regular tax and AMT.
Year
1
41............ 0.104
2
1.............. 2.396% 2.188%
2–40........ 2.500 2.500
0.312
3
1.979%
2.500
0.521
4
1.771%
2.500
0.729
5
Month property placed in service
1.563%
2.500
0.937
6
1.354%
2.500
1.146
7
1.146%
2.500
1.354
8
0.938%
2.500
1.562
9
0.729%
2.500
1.771
10
0.521%
2.500
1.979
11
0.313%
2.500
2.187
Note: For early disposition, pro-rate the depreciation from this table for the number of months in service in the disposition year (using mid-month convention).
12
0.104%
2.500
2.396
For qualified property placed in service in 2008– 2013 ( 2014 for certain long production period property and aircraft)
Year 2014 200% declining balance
3-year
1..............................66.665%
2..............................22.225
3................................7.405
4................................3.705
5-year
60.000%
16.000
9.600
5.760
5....................................................................... 5.760
7-year
57.145%
12.245
8.745
6.245
4.465
2015
10-year
55.000%
9.000
7.200
5.760
4.610
150% declining balance
15-year
52.500%
4.750
4.275
3.850
3.465
20-year
51.8750%
3.6095
3.3385
3.0885
2.8565
6....................................................................... 2.880
4.460
7.............................................................................................................. 4.465
3.685
3.275
8.............................................................................................................. 2.230
3.275
9......................................................................................................................................................3.280
10......................................................................................................................................................3.275
3.115
2.950
2.950
2.955
2.950
2.6425
2.4440
2.2610
2.2310
2.2305
11 ......................................................................................................................................................1.640
2.955
12.............................................................................................................................................................................................2.950
13.............................................................................................................................................................................................2.955
14.............................................................................................................................................................................................2.950
15.............................................................................................................................................................................................2.955
2.2310
2.2305
2.2310
2.2305
2.2310
16.............................................................................................................................................................................................1.475
2.2305
17................................................................................................................................................................................................................................. 2.2310
18................................................................................................................................................................................................................................. 2.2305
19................................................................................................................................................................................................................................. 2.2310
20................................................................................................................................................................................................................................. 2.2305
21..................................................................................................................................................................................................................................1.1155
Note: For early disposition, multiply the depreciation obtained from these tables by ½.
Caution: Special (bonus) depreciation will be available in 2014 for certain long production period property and aircraft only, unless legislation is enacted that extends the provision to other property.
4-28 2014 Tax Year | Depreciation Quickfinder ® Handbook Replacement Page 1/2015

For qualified property placed in service in 2008– 2013 ( 2014 for certain long production period property and aircraft)
Year
3-year
1..............................79.165%
2..............................13.890
3................................6.175
2014
200% declining balance
5-year
67.500%
13.000
7.800
4................................0.770
5.505
5....................................................................... 5.505
7-year
62.500%
10.715
7.655
5.465
4.375
2015
10-year
58.750%
8.250
6.600
5.280
4.225
150% declining balance
15-year
54.375%
4.565
4.105
3.695
3.325
20-year
53.2815%
3.5000
3.2410
2.9980
2.7730
6....................................................................... 0.690
4.370
7.............................................................................................................. 4.375
3.380
3.275
8.............................................................................................................. 0.545
3.275
9......................................................................................................................................................3.280
10......................................................................................................................................................3.275
2.995
2.950
2.955
2.950
2.955
11 ......................................................................................................................................................0.410
2.950
12.............................................................................................................................................................................................2.955
13.............................................................................................................................................................................................2.950
14.............................................................................................................................................................................................2.955
15.............................................................................................................................................................................................2.950
2.5650
2.3730
2.2295
2.2295
2.2295
2.2295
2.2300
2.2295
2.2300
2.2295
16.............................................................................................................................................................................................0.370
2.2300
17................................................................................................................................................................................................................................. 2.2295
18................................................................................................................................................................................................................................. 2.2300
19................................................................................................................................................................................................................................. 2.2295
20................................................................................................................................................................................................................................. 2.2300
21................................................................................................................................................................................................................................. 0.2825
Note: For early disposition, see Convention in Year of Disposition on Page 2-5.
Caution: Special (bonus) depreciation will be available in 2014 for certain long production period property and aircraft only, unless legislation is enacted that extends the provision to other property .
For qualified property placed in service in 2008– 2013 ( 2014 for certain long production period property and aircraft)
Year
3-year
1..............................70.835%
2..............................19.445
3................................7.070
2014
200% declining balance
5-year
62.500%
15.000
9.000
4................................2.650
5.685
5....................................................................... 5.685
7-year
58.925%
11.735
8.380
5.985
4.435
2015
10-year
56.250%
8.750
7.000
5.600
4.480
150% declining balance
15-year
53.125%
4.690
4.220
3.795
3.415
20-year
52.3440%
3.5740
3.3060
3.0580
2.8290
6....................................................................... 2.130
4.435
7.............................................................................................................. 4.435
3.585
3.275
8.............................................................................................................. 1.670
3.275
9......................................................................................................................................................3.280
10......................................................................................................................................................3.275
3.075
2.955
2.950
2.955
2.950
11 ......................................................................................................................................................1.230
2.955
12.............................................................................................................................................................................................2.950
13.............................................................................................................................................................................................2.955
14.............................................................................................................................................................................................2.950
15.............................................................................................................................................................................................2.955
16.............................................................................................................................................................................................1.105
2.2315
17................................................................................................................................................................................................................................. 2.2310
18................................................................................................................................................................................................................................. 2.2315
19................................................................................................................................................................................................................................. 2.2310
20................................................................................................................................................................................................................................. 2.2315
2.6165
2.4205
2.2390
2.2315
2.2315
2.2315
2.2315
2.2315
2.2315
2.2310
21................................................................................................................................................................................................................................. 0.8365
Note: For early disposition, see Convention in Year of Disposition on Page 2-5.
Caution: Special (bonus) depreciation will be available in 2014 for certain long production period property and aircraft only, unless legislation is enacted that extends the provision to other property.
Replacement Page 1/2015 2014 Tax Year | Depreciation Quickfinder ® Handbook 4-29

For qualified property placed in service in 2008– 2013 ( 2014 for certain long production period property and aircraft)
Year
3-year
1..............................62.500%
2014
2..............................25.000
3................................8.335
4................................4.165
5....................................................................... 5.650
200% declining balance
5-year
57.500%
17.000
10.200
6.120
7-year
55.355%
12.755
9.110
6.510
4.650
2015
10-year
53.750%
9.250
7.400
5.920
4.735
150% declining balance
15-year
51.875%
4.815
4.330
3.900
3.510
20-year
51.4065%
3.6445
3.3710
3.1185
2.8845
6....................................................................... 3.530
4.425
7.............................................................................................................. 4.430
3.790
3.275
8.............................................................................................................. 2.765
3.275
9......................................................................................................................................................3.280
10......................................................................................................................................................3.275
3.155
2.950
2.950
2.955
2.950
2.6680
2.4680
2.2830
2.2300
2.2300
11 ......................................................................................................................................................2.050
2.955
12.............................................................................................................................................................................................2.950
13.............................................................................................................................................................................................2.955
14.............................................................................................................................................................................................2.950
15.............................................................................................................................................................................................2.955
2.2300
2.2300
2.2305
2.2300
2.2305
16.............................................................................................................................................................................................1.845
2.2300
17..................................................................................................................................................................................................................................2.2305
18..................................................................................................................................................................................................................................2.2300
19..................................................................................................................................................................................................................................2.2305
20..................................................................................................................................................................................................................................2.2300
21..................................................................................................................................................................................................................................1.3940
Note: For early disposition, see Convention in Year of Disposition on Page 2-5.
Caution: Special (bonus) depreciation will be available in 2014 for certain long production period property and aircraft only, unless legislation is enacted that extends the provision to other property.
For qualified property placed in service in 2008– 2013 ( 2014 for certain long production period property and aircraft)
Year 200% declining balance
3-year
1..............................54.165%
2..............................30.555
3..............................10.185
2014
5-year
52.500%
19.000
11.400
4................................5.095
6.840
5....................................................................... 5.470
7-year
51.785%
13.775
9.840
7.030
5.020
2015
10-year
51.250%
9.750
7.800
6.240
4.990
150% declining balance
15-year
50.625%
4.940
4.445
4.000
3.600
20-year
50.4690%
3.7150
3.4360
3.1785
2.9400
6....................................................................... 4.790
4.365
7.............................................................................................................. 4.365
8.............................................................................................................. 3.820
3.995
3.275
3.275
9......................................................................................................................................................3.280
10......................................................................................................................................................3.275
11 ......................................................................................................................................................2.870
3.240
2.950
2.950
2.950
2.955
2.950
12.............................................................................................................................................................................................2.955
13.............................................................................................................................................................................................2.950
14.............................................................................................................................................................................................2.955
15.............................................................................................................................................................................................2.950
2.7195
2.5155
2.3270
2.2290
2.2290
2.2290
2.2290
2.2290
2.2290
2.2290
16.............................................................................................................................................................................................2.585
2.2290
17..................................................................................................................................................................................................................................2.2290
18..................................................................................................................................................................................................................................2.2295
19..................................................................................................................................................................................................................................2.2290
20..................................................................................................................................................................................................................................2.2295
21..................................................................................................................................................................................................................................1.9505
Note: For early disposition, see Convention in Year of Disposition on Page 2-5.
Caution: Special (bonus) depreciation will be available in 2014 for certain long production period property and aircraft only, unless legislation is enacted that extends the provision to other property.
4-30 2014 Tax Year | Depreciation Quickfinder ® Handbook Replacement Page 1/2015

Half-Year Convention
For property placed in service in 1994– 2013 2014
Mid-Quarter Convention–Quarter in Which Acquired Year
1.......................................50.00%
2.......................................50.00
1
87.50%
12.50
2
62.50%
37.50
3
37.50%
62.50
Note: See Indian Reservation Property on Page 2-4 for more information.
Caution: This shortened recovery period will not be available for property placed in service in 2014 unless legislation is enacted that extends the provision.
4
12.50%
87.50
Half-Year Convention
For property placed in service in 1994– 2013
2014
Mid-Quarter Convention–Quarter in Which Acquired Year
1.........................................25.00%
2.........................................37.50
3.........................................18.75
4.........................................12.50
5...........................................6.25
1
43.75%
28.13
14.06
12.50
1.56
2
31.25%
34.37
17.19
12.50
4.69
3
18.75%
40.63
20.31
12.50
7.81
Note: See Indian Reservation Property on Page 2-4 for more information.
Caution: This shortened recovery period will not be available for property placed in service in 2014 unless legislation is enacted that extends the provision.
4
6.25%
46.87
23.44
12.50
10.94
Half-Year Convention
For property placed in service in 1994– 2013
2014
Mid-Quarter Convention–Quarter in Which Acquired Year
1.........................................16.67%
2.........................................27.78
3.........................................18.52
4.........................................12.35
5...........................................9.87
6...........................................9.87
7...........................................4.94
1
29.17%
23.61
15.74
10.49
9.88
9.88
1.23
2
20.83%
26.39
17.59
11.73
9.88
9.88
3.70
3
12.50%
29.17
19.44
12.96
9.88
9.88
6.17
Note: See Indian Reservation Property on Page 2-4 for more information.
Caution: This shortened recovery period will not be available for property placed in service in 2014 unless legislation is enacted that extends the provision.
4
4.17%
31.94
21.30
14.20
9.87
9.88
8.64
Note: Use Table 1 to compute depreciation for qualified Indian reservation property with a three-year recovery period, and Tables 10–14 to compute depreciation for qualified
Indian reservation property with a nine-year or 12-year recovery period.
Replacement Page 1/2015 2014 Tax Year | Depreciation Quickfinder ® Handbook 4-31

Year
1
1............4.356%
2–3........... 4.545
4............4.546
5............4.545
6............4.546
7............4.545
8............4.546
9............4.545
10............4.546
11 ............4.545
12............4.546
13............4.545
14............4.546
15............4.545
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
2
3.977%
4.545
4.546
4.545
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
3
3.598%
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
For property placed in service in 1994– 2013
4
3.220%
4.545
4.545
4.546
5
2.841%
4.545
4.545
4.546
Month Placed in Service
6
2.462%
4.545
4.546
4.545
7
2.083%
4.545
4.546
4.545
8
1.705%
4.545
4.545
4.546
2014
9
1.326%
4.545
4.545
4.546
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.545
10
0.947%
4.545
4.546
4.545
11
0.568%
4.545
4.546
4.545
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
16............4.546
17............4.545
18............4.546
19............4.545
20............4.546
4.546
4.545
4.546
4.545
4.546
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.546
4.545
4.546
4.545
4.546
21............4.545
22............4.546
23............0.189
4.545
4.546
0.568
4.545
4.546
0.947
4.546
4.545
1.326
4.546
4.545
1.705
4.545
4.546
2.083
4.545
4.546
2.462
4.546
4.545
2.841
4.546
4.545
3.220
4.545
4.546
3.598
4.545
4.546
3.977
Note: See Indian Reservation Property on Page 2-4 for more information.
Caution: This shortened recovery period will not be available for property placed in service in 2014 unless legislation is enacted that extends the provision.
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
12
0.189%
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.545
4.546
4.356
4-32 2014 Tax Year | Depreciation Quickfinder ® Handbook
— End of Tab 4 —
Replacement Page 1/2015


Expensing Assets Under Code Section 179 ........... Page 5-1
Annual Deduction Limit ........................................... Page 5-1
Increased Limits for Targeted Areas ....................... Page 5-2
Business Taxable Income Limit ............................... Page 5-3
Pass-Through Entities............................................. Page 5-4
Qualifying Property ................................................. Page 5-6
Comparing Special Depreciation and Section 179 Expensing .................................. Page 5-8
Making the Section 179 Election............................. Page 5-9
Section 179 Recapture ........................................... Page 5-9
State Conformity to Federal Special (Bonus)
Depreciation and Section 179 Expensing
Rules .................................................................. Page 5-10
U Caution: The Section 179 expense for certain heavy passenger vehicles is limited to $25,000 per vehicle [IRC §179(b)(6)]. See
Section 179 Limit for Heavy Vehicles on Page 6-8.
If Section 179 property is placed in service during a short tax year or part way through a tax year, the annual deduction limit is not pro-rated. The limit applies no matter when during the tax year the property is placed in service.
Example: Lasso, Inc. started business on December 1, 2014, and has a
December 31 year-end. On December 10, 2014, Lasso placed in service a machine acquired that day for $ 25,000 . No other depreciable assets were placed in service during that year. If Lasso so desires, the entire $ 25,000 may be expensed under Code Section 179, subject to the business taxable income limit (see Business Taxable Income Limit on Page 5-3), even though Lasso’s initial tax year consisted of only one month.
500,000 e
A
u
C
S
179
, 2013
Year
Beginning In
Maximum
Deduction
Qualifying Property
Threshold
Taxpayers can elect to currently deduct some or all of the cost of certain qualifying property that would otherwise be subject to depreciation. (See Qualifying
Property on Page 5-6.) This Section 179 deduction is limited, however, to a maximum annual amount, which is scaled back when the taxpayer places more than a certain amount of Section 179 property in service during the tax year. The deduction is also limited by taxable income.
 Note: The Section 179 limits are for tax years beginning in a specified year [IRC §179(b)(1)]. Thus, for fiscal year taxpayers, the annual deduction limit and qualifying property phase-out threshold apply to assets placed in service during the fiscal year.
This is different than the rules for special (bonus) depreciation, which applies to assets acquired and placed in service during the calendar year regardless of the taxpayer’s fiscal year. See Tab 2 for a discussion of special (bonus) depreciation.
@ Strategy: Under the tangible property regulations, taxpayers can also currently expense small items that qualify as materials or supplies (see Materials and Supplies on Page 1-11). Likewise, certain taxpayers may qualify for a de minimis expensing rule. See
De Minimis Safe Harbor Election on Page 1-6.
A
D
l
The total cost of property that can be expensed any year is limited to a maximum deduction amount. In addition, for each dollar of Section 179 property placed in service during the year over the qualifying property threshold, the maximum deduction is reduced (but not below zero) by one dollar. See the
Section 179 Annual Limits table in the next column.
Exception : The annual deduction limit and qualifying property threshold are higher for property placed in service in certain locations. See Increased Limits for Targeted Areas on Page 5-2.
2005..................................... $ 105,000 .......................... $ 420,000
2006........................................ 108,000 .............................. 430,000
2007........................................ 125,000 .............................. 500,000
2008 or 2009 .......................... 250,000 .............................. 800,000
2012 or 2013 .......................... 500,000 ............................ 2,000,000
2014 or later ........................... 25,000 1 ............................. 200,000 1
1 The Section 179 limits have been scheduled to fall to these levels in the past and
Congress has raised them. Be alert for developments.
102,000
2,000,000
2,102,000
Example: In 2014, Chris placed in service machinery costing $ 210,000 . This cost is $ 10,000 more than $ 200,000 , so he must reduce his Section 179 annual deduction limit to $ 15,000 ($ 25,000 − $ 10,000 ).
102,000 398,000 500,000
Joint returns.
A husband and wife, whether filing joint or separate returns, are treated as one taxpayer for the annual deduction limit and qualifying property threshold. If separate returns are filed, the annual deduction limit (after any reduction for qualifying property additions over the threshold) is split in half unless both spouses elect a different allocation by multiplying the total limitations by the percentage elected. The sum of the percentages the taxpayer and spouse elect must equal 100%.
[Reg. §1.179-2(b)]
N Observation: In the case of married individuals filing separate returns for the year, the individuals are treated as one taxpayer for purposes of the dollar limitation, the property placed-in-service limitation, and the taxable income limitation [IRC Sec. 179(b)(4)(A)].
These rules for married individuals apply to legally married samesex individuals. (Rev. Rul. 2013-17)
2014 Tax Year | Depreciation Quickfinder ® Handbook 5-1 Replacement Page 1/2015

Controlled group.
When a corporation is a member of a controlled group (greater than 50% ownership), the annual dollar and qualifying property limitations are apportioned among the members of the group [IRC §179(d)(6)]. In addition, property purchased from another group member does not qualify as Section 179 property.
See Controlled Groups on Page 5-3 for more information. i
l
t
A
(Pre-2014)
 Expired Provision Alert: For assets placed in service before
2014, increased Section 179 deduction and qualifying property limits applied to certain enterprise zone businesses. This provision is not available for property placed in service after 2013 unless legislation is enacted to extend it. This discussion is included in the event the increased limits are extended to 2014.
An enterprise zone business (defined in Code Section 1397C) that places qualified zone property in service in an empowerment zone before 2014 can increase its Section 179 deduction and qualifying property limits. See Glossary on Page 13-3 for a list of the empowerment zones.
Qualified zone property. This is property depreciable under Code
Section 168 (MACRS) that meets all of the following requirements:
(IRC §1397D)
1) The taxpayer acquires it by purchase after the date the empowerment zone designation took effect.
2) Its original use in an empowerment zone commences with the taxpayer. Used property may qualify as long as it has not previously been used in the empowerment zone.
3) Substantially all of its use is in an empowerment zone in the active conduct of a qualified business by the taxpayer in the zone.
N Observation: Presumably, qualified business in item 3 has the same meaning as in Code Section 1397C, which defines an enterprise zone business.
Substantial renovation. Requirements 1 and 2 above are considered satisfied if the taxpayer substantially renovates the property.
Property is substantially renovated if, during any 24-month period beginning after the date the zone designation takes effect, additions to the taxpayer’s basis of the property exceed the taxpayer’s adjusted basis at the beginning of the 24-month period (or, if greater, $5,000).
Sale-leaseback. For requirement 2 above, property that is sold and leased back by the taxpayer within three months after the date it was originally placed in service is treated as originally placed in service not earlier than the date it is used under the leaseback.
Annual deduction limit.
The annual Section 179 deduction limit is increased by the smaller of: [IRC §1397A(a)]
• $35,000 or
• The cost of Section 179 property that is also qualified zone property placed in service during the year.
Qualifying property threshold.
Only 50% of the cost of qualified zone property placed in service is counted when determining whether the qualifying property threshold has been exceeded.
U Caution: Qualified Section 179 disaster assistance property
(see
Disaster Assistance Property Pre-2013
in the next column) is not treated as qualified zone property unless the taxpayer elects not to treat the property as qualified Section 179 disaster assistance property.
5-2 2014 Tax Year | Depreciation Quickfinder ® Handbook
An increased Section 179 deduction was available for qualified
Section 179 disaster assistance property placed in service in a federally declared disaster area if the disaster was declared after
2007 and occurred before 2010 [IRC §179(e)]. A list of the federally declared disaster areas is available at www.fema.gov.
Qualified Section 179 disaster assistance property is property that qualifies for Section 179 expensing (see Qualifying Property on
Page 5-6), is placed in service after 2007 and is qualified disaster assistance property. Generally, qualified disaster assistance property is property acquired by purchase on or after the applicable disaster date that rehabilitates or replaces property damaged, destroyed or condemned as a result of the federally declared disaster. The property must be placed in service by the last day of the third calendar year following the applicable disaster date
[IRC §168(n)(2)].
Example: A disaster occurred in a federally declared disaster area on Janu ary 2, 2009. John Smith placed property that qualified for Section 179 expens ing in service on December 30, 2012. This property meets the requirements to be considered qualified Section 179 disaster assistance property for 2012 as it was placed in service on or before December 31, 2012 (the end of the third calendar year following the applicable disaster date).
Annual deduction limit.
The annual Section 179 deduction limit was increased by the smaller of: [IRC §179(e)(1)]
• $100,000 or
• The cost of qualified Section 179 disaster assistance property placed in service during the year.
Qualifying property threshold.
The qualifying property threshold was increased by the smaller of:
•
•
$600,000 or
The cost of qualified Section 179 disaster assistance property placed in service during the tax year.
Renewal communities.
The increased Section 179 deduction rules that apply to qualified zone property placed in service by
an enterprise zone business (see Enterprise Zone Businesses in
the preceding column) apply to qualified renewal property placed in service before 2010 by a renewal community business [IRC
§1400J(a)]. The list of renewal communities can be found at egis.
hud.gov/ezrclocator .
New York Liberty Zone.
For NY Liberty Zone assets placed in service before 2007, the annual expensing limit was increased by up to $35,000, and only 50% of the cost of qualifying assets was counted toward the qualifying property threshold. [IRC §1400L(f)]
Gulf Opportunity (GO) Zone .
The expensing limit and qualifying property thresholds were increased by up to $100,000 and
$600,000, respectively, for GO Zone property placed in service before 2008. [IRC §1400N(e)]
Kansas disaster area.
The rules for increasing the Section 179 expensing limit that applied to GO Zone property also apply to qualified recovery assistance property (property placed in service in the Kansas disaster area) placed in service before 2009. [P.L.
110-246, Sec. 15345(d)(2)]
If any qualified disaster assistance property placed in service during the year ceases to be qualified disaster assistance property in a later year, the benefit of the increased Section 179 deduction must be recaptured. [IRC §179(e)(4)]
Replacement Page 1/2015

Similar rules apply to:
• Qualified zone property that ceases to be used in an empower ment zone by an enterprise business. [IRC §1397A(b)]
• Qualified renewal property that ceases to be used by a renewal community business in a renewal community. [IRC §1400J(a)]
• Liberty Zone property that ceases to be used in the New York
Liberty Zone. [IRC §1400L(f)(3)]
• GO Zone property that ceases to be GO Zone property.
[IRC §1400N(e)(4)]
• Qualified recovery assistance property that ceases to be recovery assistance property. [P.L. 110-246,
Sec. 15345(d)(2)]
N Observation: To qualify for the additional
Section 179 expensing discussed in this section, substantially all of the property must be used in the taxpayer’s trade or business in the targeted area. If more than
20% of the property’s use is either outside the GO Zone or is not in the active conduct of a trade or business by the taxpayer in the
GO Zone, the property isn’t used substantially for business in the
GO Zone (Notice 2006-77). This same rule applies to recovery assistance property placed in service in the Kansas disaster area
(Notice 2008-67). Although these notices deal with recovering the benefits of special (bonus) depreciation for assets placed in service in the GO Zone and the Kansas disaster area, presumably the same rule applies to recapturing the additional Section 179 deduction allowed for assets placed in service in all the targeted areas described in this section.
Like-kind exchanges and involuntary conversions.
See Notice 2008-25 for special depreciation recapture rules that apply when GO Zone property is exchanged in a like-kind exchange or involuntary conversion. Presumably, these rules would also apply to other property that had qualified for additional Section 179 expensing in an earlier year.
B
t
i
l
The Section 179 deduction is limited to the taxpayer’s aggregate taxable income derived from the active conduct of all trades or businesses, including: [IRC §179(b)(3); Reg. §1.179-2(c)]
• Business income or loss generated by partnerships, corporations and LLCs.
• Wages, salaries, tips and other compensation.
• A partner or S corporation shareholder’s pass-through share of entity taxable income or loss from the active conduct of any of the entity’s trades or businesses, provided that he is engaged in the active conduct (that is, he meaningfully participates in management or operations) of at least one of the entity’s trades or businesses.
• Income or loss from Schedule C and Schedule F.
• Section 1231 gains (or losses) from a trade or business.
• Section 1245 and 1250 depreciation recapture from a trade or business.
• Interest earned from working capital related to a trade or business.
Business taxable income is not reduced by:
• Any NOL carryover or carryback to the tax year.
• The deduction for self-employment taxes.
• Unreimbursed employee business expenses.
• The Section 179 deduction.
• Special deductions, such as the dividend received deduction (for corporations other than S corporations).
 Note: See Pass-through entity’s taxable income on Page 5-5 for special rule for partnerships and S corporations.
Replacement Page 1/2015
Taxable income or losses from investments or hobbies do not count as income from an active trade or business.
The active conduct of a trade or business for the Section 179 taxable income limit is not the same as material participation under the Code Section 469 passive activity rules. Income is derived from an active trade or business for the Section 179 test if the taxpayer meaningfully participates in the business’s management or operations [Reg. §1.179-2(c)(6)(ii)]. This includes making highlevel management decisions, even if the everyday operational decisions are left to an agent or employee.
Example: Adam owns a salon as a sole proprietorship and employs Brenda to operate it. Adam manages the salon by performing tasks such as reviewing developments relating to the business and approving the annual budget, while Brenda performs the day-to-day operating functions, including hiring employees, purchasing supplies and writing checks for bills and salaries.
In 2014, Brenda purchased, for use in the salon and with its funds, qualified
Section 179 equipment for $9,500. Adam’s net income from the salon, before the Section 179 deduction, was $8,000.
Adam also is a partner in PRS, a partnership that owns a grocery store. Adam does not participate in the management or operations of the grocery store, and
PRS did not purchase any Section 179 property during 2014. Adam’s allocable share of partnership net income was $6,000.
Based on the facts and circumstances, Adam meaningfully participates in the management of the salon but not the grocery store. Therefore, Adam’s aggregate taxable income derived from the active conduct of any trade or business is $8,000, the net income from the salon.
@ Strategy: Business taxable income does not have to be generated by the business in which the Section 179 property is used to count toward the business taxable income limit. In fact, the trade or business in which the Section 179 property is used can generate a loss, as long as the taxpayer’s net business taxable income from all sources is positive.
Example: Jon actively conducts the business of his sole proprietorship, which has a $45,000 loss for 2014 before considering any Section 179 deduction.
He also reports $65,000 of wages and $3,000 of Section 1245 depreciation recapture from a partnership interest. He is active in the partnership’s business.
Jon’s aggregate business taxable income for the Section 179 taxable income limit is $23,000 ($65,000 of wages plus $3,000 from the partnership minus
$45,000 loss from the proprietorship). Jon can claim up to $23,000 of Section
179 expense in 2014 (assuming total qualifying property does not exceed
$ 200,000 ) for Section 179 property placed in service for his Schedule C activity.
2,000,000
Joint return.
If a joint return is filed, the taxable incomes (or losses) of both spouses are aggregated, even though the Section
179 deduction may be related to the activities of only one spouse.
Example: Sue and Bo file a joint return. Sue has Form W-2 income of $36,000 in 2014. Bo reports a $13,000 business loss from his proprietorship; their aggregate business taxable income for claiming a Section 179 deduction for Bo’s proprietorship is $23,000 ($36,000 – $13,000). Bo can claim up to $23,000
(smaller of $23,000 or $ 25,000 limit) of Section 179 expense in 2014 assuming total qualifying property additions do not exceed $ 200,000 .
500,000 2,000,000
Component members of a controlled group (whether or not they file a consolidated tax return) are treated as a single taxpayer for the annual expensing limit and the business taxable income limit.
[IRC §179(d)(6)(A)]
For Section 179 purposes, a controlled group is defined by reference to Code Section 1563(a), but using a more-than-50% (instead of an at least 80%) stock ownership test when determining parentsubsidiary status [IRC §179(d)(7)]. When determining brother-sister status, both the 80% test and the more-than-50% test apply.
2014 Tax Year | Depreciation Quickfinder ® Handbook 5-3

2,200,000 300,000 500,000
Example: Corporations P, Q, R and S are component members of a controlled group for Section 179 purposes. The corporations collectively purchased
$ 220,000 of qualifying Section 179 property in 2014. The group’s maximum
Section 179 deduction for 2014 is $ 5,000 ($ 25,000 maximum minus $ 20,000 excess over the $ 200,000 qualifying property threshold).
2,000,000
Component members of a controlled group on December 31 of a given year are treated as one taxpayer for the Section 179 limits for each member’s tax year that includes that December 31 [Reg.
§1.179-2(b)(7)]. The Section 179 deduction can be taken by any one component member or allocated among the members in any manner. Exception: The Section 179 deduction allocated to any member cannot exceed the cost of Section 179 property actually purchased and placed in service by that member [Reg. §1.179-
2(b)(7)(i)]. If the members have different tax years, the tax year taken into account is the tax year of the member whose tax year begins on the earliest date.
If a consolidated return is filed for all members of the group, the allocation is made by the common parent. If separate returns are filed, the allocation is made pursuant to an agreement entered into by members of the group.
If a consolidated return is filed for all members of the controlled group, the allocation may not be revoked after the due date, including extensions, of the common parent’s return on which the Section
179 election is made [Reg. §1.179-2(b)(7)(iii)]. If any members file separate returns for the tax year including a particular December 31, the allocation cannot be revoked after the due date, including extensions, of the return of the member whose tax year ends the latest.
S corporations included in controlled group.
In an information letter, the IRS says that even if an S corporation is a member of a controlled group (based on the 50% ownership test), it is not a component member of the group. Since the S corporation and the other group members are not treated as a single taxpayer for the Section 179 limits, the S corporation can claim the maximum election amount even if it is a member of a controlled group. (INFO
2013-0016)
U Caution: Information letters are not a ruling and have no binding effect on the IRS. However, the letter is an indication of the
IRS’s current position on this issue. Tax professionals should be alert for developments.
Use one of the methods shown below when the Section 179 deduction is reduced by the business taxable income limit. Either method will result in net income of zero for the current year, but will provide different rates of cost recovery in future years. Projections are necessary to determine the better method to use.
Method #1: Determine the amount of Section 179 expense that will result in a taxable income of zero when combined with depreciation. Remaining basis is recovered via depreciation over future years. This will avoid the possibility that Section 179 carryovers are locked up by the taxable business income limit in future years.
 Note: This formula assumes that the default MACRS method is used, the half-year convention applies and special (bonus) depreciation is not taken on the asset.
Formula for optimal Section 179 deduction (Method #1)
[ (M × N) – A ] ÷ [ 1 – M ] = D
M = MACRS Recovery Period
N = Business Taxable Income Before
Depreciation and Section 179
Deduction
A = Asset Cost
D = Section 179 Deduction
200,000
Example: Martha purchased a previously used five-year MACRS asset on
March 1, 2014, for $105,000. Her business taxable income was $23,700 before the Section 179 deduction and depreciation.
Using Method #1, the optimal Section 179 deduction is:
(5 × $23,700) – $105,000 = $13,500 =
1 – 5 <4>
< $3,375>
Business taxable income before depreciation
and Section 179 expense .................................................. $ 23,700
Section 179 deduction ....................................................... < 3,375 >
MACRS depreciation
($105,000 – $3,375) × 20.00% .......................................... < 20,325 >
Net taxable income ............................................................ $ 0
Method #2: Elect the maximum Section 179 expense available for the tax year. The amount disallowed because of the business taxable income limit is carried forward as a Section 179 expense in the following year. This method is beneficial if income increases enough in the next year to absorb most or all of the carried forward
Section 179 expense.
the entire $105,000
Example: Using Method #2 for the preceding example, Section 179 election is made for $25,000 of the basis of the asset placed in service. Only $23,700 is deductible in 2014. The remaining $ 1,300 ($ 25,000 – $23,700) carries over and may be deductible as a Section 179 expense in 2015, subject to the business taxable income limit and the annual deduction limit.
81,300 105,000
Any Section 179 deduction that cannot be deducted because of the taxable income limit is carried over to the following year [Reg.
§1.179-3(a)]. This disallowed deduction amount is shown on line
13 of Form 4562. It should be entered on the following year’s Form
4562. There is no limit on the number of years a Section 179 deduction can be carried forward. Exception: Special rules apply to carryforwards attributable to qualified real property. See Qualified
Real Property on Page 5-8.
The carryover is used on a first-in, first-out basis. If costs from more than one year are carried forward to a year where they cannot all be utilized, the earliest year carryovers are used first.
If the property is disposed of (including a transfer at death) before the related carryover is utilized, a Section 179 deduction is not allowed for the remaining carryover amount. Instead, the carryover is added to the property’s basis.
If more than one property is placed in service in a year, the taxpayer can select the properties for which all or a part of the costs will be carried forward. This selection must be shown in the taxpayer’s books and records. Section 179 costs allocated from a partnership or an S corporation are treated as one item of Section 179 property.
If no selection is made, the carryover is allocated equally among the properties expensed for the year.
p
-t
e
Partnerships and S corporations must apply the annual deduction limit, qualifying property limit and business taxable income limit before passing through any Section 179 expense. The limits then apply again to each individual partner or shareholder. [Reg.
§1.179-2(b) and (c)]
U Caution: Estates and trusts cannot make Section 179 elections [IRC §179(d)(4)]. Therefore, the fiduciary must capitalize and depreciate all tangible personal property placed in service by the entity. However, see Special (Bonus) Depreciation on Page 2-12, which is available to estates and trusts in tax years that it applies.
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500,000
The annual deduction limit applies at both the pass-through entity level and the owner level. In other words, for tax years beginning in 2014, a pass-through entity cannot allocate a Section 179 deduction exceeding $ 25,000 , and an owner cannot deduct a
Section 179 expense (including the amount passed through by the entity) exceeding $ 25,000 . However, an owner does not include his allocable share of the pass-through entity’s cost of qualifying property in determining whether his qualifying property additions exceed the threshold. [Reg. §1.179-2(b)(3) and (4)]
U Caution: A taxpayer who owns interests in two or more passthrough entities could be allocated Section 179 deductions that exceed the taxpayer’s annual deduction limit. If this occurs, the amount in excess of the limit is not allowed as a carryforward. The excess deduction is permanently lost unless the pass-through entities revoke an appropriate amount of their Section 179 election. In addition, taxpayers must reduce their basis in the pass-through entities as if the full Section 179 deductions had been allowed. (Rev. Rul. 89-7)
See Revoking the Election on Page 5-9 for information regarding revoking a Section 179 election.
The amount of Section 179 expense that can be allocated by a pass-through entity to its owners cannot exceed the entity’s aggregate business taxable income for that year.
If aggregate business taxable income is less than the deduction limit, a pass-through entity may still elect expensing up to the deduction limit, but it cannot pass through the amount that would reduce its taxable income below zero. That amount is carried forward at the entity level.
Example: Winston Co. (a calendar-year partnership) owns and operates a restaurant. During 2014, Winston places in service a cash register costing
$5,000 and office furniture costing $6,000. Both qualify as Section 179 property.
Winston elects under Code Section 179 to expense $11,000.
For 2014, Winston’s taxable income (before any Section 179 deduction) derived from the active conduct of its restaurant business is $6,000. Therefore, Winston can pass through only $6,000 ($11,000 – $5,000) of Section 179 expense to its partners in 2014. The remaining $5,000 is carried forward at the partnership level. Winston reduces the Section 179 property’s adjusted basis by $11,000, the full amount elected to be expensed.
Assume that in 2015, Winston makes no fixed asset purchases and generates
$20,000 of business taxable income. It will pass through the $5,000 Section
179 expense carried forward from 2014 to its partners in 2015.
Pass-through entity's taxable income.
Business taxable income for pass-through entities is computed the same way as for all taxpayers (see Business Taxable Income Limit on Page 5-3) except
S corporation deductions for compensation paid to shareholder/ employees and partnership deductions for guaranteed payments are added back to income.
He carries over $19,500 ($94,500 - $75,000) of the elected Section 179 costs to 2015.
Owner’s share of pass-through entity’s taxable income.
For the business taxable income limit, partners and S corporation shareholders who are engaged in the active conduct of one or more of a pass-through entity’s trades or businesses include their allocable share of taxable income derived from the entity’s active conduct of any trade or business.
Example: In 2014, Asta Partnership placed in service Section 179 property costing $ 2,025,000 . Asta must reduce its annual deduction limit by $ 25,000
($ 2,025,000 − $ 2,000,000 ), so its maximum Section 179 deduction is $ 475,000 .
Asta elects to expense $ 475,000 . Asta’s business taxable income for the year was $ 2,500,000 , so it can pass through the full $ 475,000 to its partners. Asta passes through $9,500 of its Section 179 deduction and $50,000 of its taxable income to Dean, a partner. Dean is also a partner in Jethro Partnership, which allocated him a $ 30,000 Section 179 deduction and $ 30,000 of taxable income from the active conduct of its business. He also operates a sole proprietorship that placed in service qualifying Section 179 property costing $55,000 and generated a net loss of $5,000 (before considering any Section 179 expense).
Dean does not have to include the partnership’s qualifying property additions to figure the reduction in his annual deduction limit. His qualifying property additions for the year are $55,000, so his annual deduction limit is $ 500,000 .
He elects to expense the $ 39,500 ($9,500 from Asta plus $ 30,000 from Jethro) of Section 179 costs passed through from the partnerships plus $5,500 of the
$55,000 of his sole proprietorship’s Section 179 costs, for a total of $ 94,500 .
His deduction of $25,000 does not exceed his business taxable income of
$50,000 ($50,000 from Asta Partnership, plus $ 30,000 from Jethro Partnership minus $5,000 loss from his sole proprietorship) , so he has no Section 179 deduction carryover to 2015.
is limited to his business taxable income of $75,000.
The pass-through entity reduces its basis in assets for the full amount of Section 179 expense elected, even if some of the expense cannot be passed through to the owners due to the business taxable income limit [Reg.
§1.179-1(f)]. The owners, however, reduce their basis in the partnership or S corporation only by the amount of Section 179 expense passed through.
The owner’s basis in his partnership interest or S corporation stock is reduced even if he gets no current deduction due to the taxable income limit at the owner level. However, any
Section 179 carryovers remaining when the pass-through entity is disposed of increase the owner’s basis in the entity and, thus, reduce the gain (or increase the loss) realized upon the disposition.
Example: Gordon is a general partner in GeeDee and is active in the partnership’s business. During 2014, GeeDee allocates $15,000 of Section
179 expense and $15,000 of taxable income (all of which is from the active conduct of a trade or business) to Gordon. Gordon also conducts a business as a sole proprietor. For 2014, the business incurs an $11,000 tax loss, so his taxable income limit for Section 179 expensing is $4,000 ($15,000 – $11,000).
Therefore, Gordon can deduct only $4,000 of passed through Section 179 expense and carries over the remaining $11,000. However, he reduces his basis in GeeDee by $15,000.
On January 1, 2015, Gordon sells his partnership interest. Immediately before the sale, Gordon increases the adjusted basis of his partnership interest by
$11,000, the Section 179 carryover remaining.
Example: Kayco, Inc., an S corporation, generated a $65,000 loss from trade or business activities and $8,000 of income from investment activities in 2014.
Kayco paid its sole shareholder, Kay, $80,000 in salary during 2014. All of this salary was deducted from the trade or business income. Kayco also purchased one asset during the year, a $ 600,000 piece of equipment that is Section 179 property. Kayco’s business taxable income limit is as follows:
Loss from trade or business .................................................
Employee/shareholder wages ..............................................
$ <65,000>
80,000
Business taxable income limit ..............................................
$ 15,000
Kayco can elect expensing up to $ 500,000 for 2014, but can only pass through
$15,000 to Kay. The remaining $ 485,000 ($ 500,000 – $15,000) is carried forward at the entity level.
U Caution: Only the Section 179 expense that was unused due to the owner’s business taxable income limit increases his basis when the interest in the entity is disposed of. In contrast, a basis reduction for passed-through Section 179 expense that was unused because it exceeded the owner’s annual deduction limit is permanent.
Carryover from C corporation to S corporation years.
A
C corporation may have a Section 179 carryover at the time it
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makes an election to be an S corporation. A Section 179 carryover cannot be carried from a C corporation year to an S corporation year. [IRC §1371(b)]
æ Practice Tip: A C corporation that finds itself in this situation may want to revoke its Section
179 election rather than losing the carryover. See
Revoking the Election on Page 5-9 for further discussion.
While the Section 179 election is made at the pass-through entity level, the tax benefits are reaped at the owner level. Partners or shareholders that are trusts or estates are ineligible for the Section
179 expensing privilege. Still, the pass-through entity should consider the election when other partners or shareholders will benefit.
Depreciable personal property additions allocable to trust and estate owners that otherwise would be immediately deducted under
Code Section 179 must be capitalized and depreciated using any allowable depreciation method. [Reg. §1.179-1(f)(3)]
Q
p
To qualify for the Section 179 deduction, property (new or used) must be all of the following:
• Eligible property (see
Eligible Property in the next column).
• Used more than 50% in an active trade or business in the year placed in service.
• Acquired by purchase from an unrelated party.
Related persons.
For this test, related persons include:
1) An individual and his family members (including only a spouse, ancestors and lineal descendants). Starting September 16,
2013, the term spouse includes an individual married to a person of the same sex if they are lawfully married under state law, even if they are domiciled in a state that does not recognize the validity of same-sex marriages. (Rev. Rul. 2013-17)
2) A corporation and an individual who owns (directly or indirectly) more than 50% of the value of the corporation’s stock.
3) Two corporations that are members of the same controlled group.
4) The grantor and fiduciary, and the fiduciary and beneficiary, of any trust.
5) The executor and beneficiary of any estate.
6) A partnership and a person who directly or indirectly owns more than 50% of the partnership interest.
See IRS Pub. 946 for additional related parties.
N Observation: Property acquired in a like-kind exchange qualifies for Section 179 expensing only to the extent of any excess basis (generally, boot given in the trade). See Depreciating Property
After a Like-Kind Exchange on Page 9-6.
Example: Ken Larch is a tailor. He bought two industrial sewing machines from his father. He placed both machines in service in the same year he bought them. They do not qualify as Section 179 property because Ken and his father are related persons.
Partial business use. When property is used for both business and nonbusiness purposes, the Section 179 deduction can be elected only if the property is used more than 50% for business in the year it is placed in service. Even then, only the business-use portion of the property qualifies for the Section 179 election.
Property converted from personal use. An asset must meet all the requirements for expensing in the year it is placed in service.
Property originally acquired for personal use (or 50% or less business use) and later converted to more than 50% business use does not qualify.
5-6 2014 Tax Year | Depreciation Quickfinder ® Handbook
Example: Courtney purchased a computer for $2,000 in 2014. During that year, she uses it 80% for her business and 20% for personal purposes. Only $1,600
($2,000 × 80%) of the computer’s cost qualifies for the Section 179 election.
Variation : Assume that Courtney uses the computer 40% for business in 2014 and 80% for business in 2015. She cannot take a Section 179 deduction on this property in any year because it did not meet the requirements for Section
179 expensing (that is, wasn’t used more than 50% for business in the year it was placed in service).
Listed property purchased by an employee. No Section 179 expense is allowed for listed property (for example, cars, computers or cameras) purchased by an employee for use in his employer’s business unless the use of the asset is: [IRC §280F(d)(3)(A)]
1) Required as a condition of employment and
2) For the employer’s convenience.
See Tab 6 for more on listed property.
T o be eligible for the Section 179 deduction, property must be one of the following types of depreciable property: [IRC §179(d)(1) and
1245(a)(3); Reg. §1.1245-3(c)]
1) Tangible personal property.
2) Other tangible property (except buildings and their structural components) used as:
• An integral part of manufacturing, production or extraction or of furnishing transportation, communications, electricity, gas, water or sewage disposal services or
• A research or bulk storage facility used in con -
nection with such activities. (See Other tangible property below.)
3) Single purpose agricultural (livestock) or horticultural 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 (if placed in service in a tax year beginning before 2014) .
2014
6) Qualified real property placed in service in a tax year beginning in 20102013 . See Qualified Real Property on Page 5-8.
Tangible personal property.
Tangible personal property is any tangible property that is not real property. It includes:
• Machinery and equipment.
• Property contained in or attached to a building (other than struc tural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment and signs.
• Gasoline storage tanks and pumps at retail service stations.
• Livestock, including horses, cattle, hogs, sheep, goats, mink and other furbearing animals.
Whether property is 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.
Other tangible property.
This is tangible property (other than buildings and their structural components) described at Regulation
Section 1.48-1(d). Manufacturing, production or extraction includes construction, reconstruction, or making property out of scrap, salvage, or junk material, as well as from new or raw material, by processing, manipulating, refining, or changing an article’s form, or by combining or assembling two or more articles. It includes cultivat
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ing the soil, raising livestock and mining minerals. Eligible property in this category includes property used as an integral part of the:
• Extraction, processing, or refining of metallic and nonmetallic minerals, such as oil, gas, rock, marble or slate.
• Construction of roads, bridges or housing.
• Processing of meat, fish or other foodstuffs.
• Cultivation of orchards, gardens or nurseries.
• Operation of sawmills, the production of lumber, lumber products or other building materials.
• Fabrication or treatment of textiles, paper, leather goods or glass.
• Rebuilding, as distinguished from the mere repairing, of machinery.
Used as an integral part means that the asset is used directly in the activity and is essential to its completeness. Examples include storage facilities, fencing used in a farming activity and water wells that provide water for an activity. Tax professionals should not overlook this category of Section 179-eligible assets.
1
• Airplanes.
• Automobiles.
• Billboards (if movable).
• Computers.
• Drain tiles used to improve the drainage of a pasture.
• Fences used in farming business.
• Gasoline storage tanks and pumps and retail service stations.
• Helicopters.
• House trailers (movable, wheels attached).
• Livestock (including horses, cattle, hogs, sheep, goats and mink and other fur-bearing animals).
• Machinery and equipment.
• Office equipment—copiers, typewriters, fax machines, etc.
• Office furniture—desks, chairs, file cabinets, book shelves, etc.
• Off-the-shelf computer software.
2
• Oil and gas well and drilling equipment.
• Paved barnyards that are used to keep livestock out of mud and to load them onto trucks.
• Qualified real property.
3
• Signs (if movable).
• Single purpose agricultural or horticultural structures.
• Storage facility that does not have additional workspace (for example, grain bins, corn cribs, silos).
• Store counters.
• Testing equipment.
• Tractors.
• Trucks.
• Vineyards (including vineyards planted by taxpayer). (CCA 201234024)
• Water wells that provide water for raising livestock.
1 Not an exhaustive list.
2 Placed in service in a tax year beginning in 2003– 2013 .
3 Placed in service in a tax year beginning in 2010– 2013 .
2014
Section 179 expensing is denied for any property that is: [IRC
§179(d)]
1) Used predominantly to furnish lodging or in connection with
furnishing lodging. See Property Used to Furnish Lodging below.
2) Used outside of the U.S.
3) Used by certain tax-exempt organizations.
4) Used by certain governmental units, or foreign persons or entities.
5) An air-conditioning or heating unit.
6) Certain property leased to others (see Leased Property in the next column).
A lodging facility is a facility where sleeping accommodations are provided, such as an apartment, rent house or dormitory. It is not necessary that rent be charged. Lodging facilities (trailers) furnished rent-free to employees were lodging facilities. [ Union
Pacific Corporation , 91 TC 32 (1988)]
IRS Ruling.
A motor home used by an employee for traveling to and lodging at temporary work locations was used predominantly for lodging when it was used at least as many days for lodging as for transportation. (TAM 8546005)
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Property used in the living quarters of a lodging facility (for example, beds and other furniture, refrigerators, ranges) is used predominantly to furnish lodging and is not eligible for the Section 179 deduction.
Also, lobby furniture, office equipment, and laundry and swimming pool facilities are examples of property used in connection with furnishing lodging. Finally, property (for example, furniture) leased to a landlord who uses it to furnish (or in connection with furnishing) lodging is treated as used to furnish lodging. (Rev. Rul. 81-133)
 Note: Because property used to furnish lodging does not qualify as Section 179 property, most taxpayers with residential rental property cannot claim Section 179 deductions for property used in connection with the rentals (for example, appliances for a rent house).
Exception. Some property, even though used in a facility where sleeping accommodations are provided, is not considered to be used predominantly to furnish lodging and thus may be eligible
Section 179 property.
IRC § 50(b)(2)
Exception
Assets used in nonlodging commercial facilities
Description
Facilities (for example, restaurants, drug stores, grocery stores, vending machines and coinoperated washers and dryers) available equally to tenants and nontenants.
Assets used in hotel/motel More than 50% of the establishment’s living quarters are used during the year by transients
(rental period normally less than 30 days).
Certified historic structure
Energy property
The portion of the basis that is attributable to qualified rehabilitation expenditures.
Certain equipment that uses solar energy or energy derived from a geothermal deposit to produce electricity that meets certain standards of performance and quality. See Pub. 946 for details.
For noncorporate taxpayers, property leased to others is not eligible for Section 179 expense, unless:
1) The taxpayer manufactures (or produces) the property or
2) The taxpayer purchases the property to lease to others and both the following tests are met:
• The term of the lease (including options to renew) is less than
50% of the property's class life.
• For the first 12 months after the property is transferred to the lessee, the total business deductions on the property exceed
15% of the property’s rental income.
• Air conditioning units.
• Barns.
• Billboards (if not movable).
• Bridges.
• Buildings. Exception: Qualified real property.
• Car washes.
• Docks.
• Elevators.
• Escalators.
• Fences (not used in farming business).
• Foreign used property.
• Heating units.
• Investment property.
• Land.
• Landscaping.
• Property used to furnish lodging.
• Roads.
• Shrubbery.
• Sidewalks.
• Stables.
• Swimming pools.
• Trailers (nonmobile with wheels detached and permanent utilities).
• Warehouses.
• Wharves.
Note: This is not an exhaustive list.
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 Expired Provision Alert: Qualified real property placed in service in tax years beginning in 2010–2013 was eligible for Section
179 expensing. This provision is not available for property placed in service in tax years beginning after 2013 unless legislation is enacted to extend it. This discussion is included in the event the provision is extended to tax years beginning in 2014.
For tax years beginning in 2010– 2013 , qualified real property is eligible for up to $250,000 of Section 179 expensing.
Qualified real property is any of the following:
1) Qualified leasehold improvement property.
2) Qualified restaurant property.
3) Qualified retail improvement property.
2014
See Qualified Leasehold Improvements on Page 7-9 and Qualified
Restaurant Property and Qualified Retail Improvement Property on Page 7-10 for definitions.
Qualified real property does not include any property that is listed under Ineligible Property on Page 5-7.
U Caution: Qualified real property generally is Section 1250 property that is depreciated straight-line, so there is no ordinary income recapture if the property is sold at a gain. But, to the extent of any Section 179 expense taken on qualified real property, that property is reclassified as Section 1245 property, meaning the
Section 179 expense is subject to recapture as ordinary income if the property is sold at a gain. [IRC §1245(a)(3)(C)]
Limits on carryforward. Any Section 179 deduction for qualified real property that is unused due to the taxable income limit cannot be carried to a tax year beginning after 2014 [IRC §179(f)(4)(A)]. Any carryforward remaining at the end of the taxpayer’s last tax year beginning in 2014 is treated as placed in service in that last 2014 tax year. If the unused carryforward is due to property actually placed in service in a tax year other than the taxpayer’s last tax year beginning in 2014 [generally a tax year beginning in 2010– 2013 , but also a tax year beginning in 2014 that is not the taxpayer’s last tax year beginning in 2014 (where the taxpayer has more than one tax year beginning in 2014 —short tax year situations)], it is treated as placed in service on the first day of the taxpayer’s last tax year beginning in 2014 [IRC §179(f)(4)(C)]. If the unused carryforward is due to property placed in service in the taxpayer’s last tax year beginning in 2014 , the property is treated as if the Section 179 election was never made. [IRC §179(f)(4)(B)]. Note: The Code’s taxpayer’s last tax year beginning in 2014 wording, as used in this and the next paragraph, is necessitated by the possibility of a taxpayer having more than one tax year beginning in 2014 (short tax year situations).
For the taxpayer’s last tax year beginning in 2014 , the Business
Taxable Income Limit on Page 5-3 is determined without considering any depreciation expense on any basis increase due to applying the carryover limit for qualified real property. [IRC §179(f)(4)(C)]
If the taxpayer has a Section 179 carryforward that arose in a year that the Section 179 election was made for both qualified real property and other eligible assets, the carryforward is deemed to consist of a proportionate amount of each type of property, based on the cost of each when the Section 179 election was made. The aggregate amount of the carryover must be allocated pro-rata between the qualified real property and the other types of Section 179 property (Notice 2013-59). Note also that the $250,000 deduction for qualified real property was originally effective for tax years beginning in 2010 and 2011, and then later extended to tax years beginning in 2012 and 2013 . Due to the taxable income limitation, a taxpayer may have disallowed 2010 or 2011 deductions that were treated as placed in service on the first day of the taxpayer’s last tax year beginning in 2011. These taxpayers may either (1) continue that treatment; or (2) if the period of limitations
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– 2014
– 2014 for assessment under IRC §6501(a) is open, amend their tax return for the last tax year beginning in 2011 to carry the 2010 or 2011 disallowed deduction to any tax year beginning in 2012 or 2013 . If this is done, appropriate adjustments must be made on amended tax returns for any affected succeeding tax years within the time prescribed for filing an amended return for those years. (See Notice
2013-59 for additional guidance and procedural requirements.)
Example: In 2013 , JaneCo (a calendar-year C corporation) elected Section 179 expensing for $25,000 of qualified real property and $50,000 of machinery and equipment. But, JaneCo’s Section 179 deduction for 2012 was limited to $60,000 (under the business taxable income limit). JaneCo’s Section 179 carryforward from 2013 is $15,000 ($75,000 – $60,000), which consists of:
Personal Property ............. $15,000 × 50,000 ÷ 75,000 .............$10,000
Qualified Real Property ...... $15,000 × 25,000 ÷ 75,000 .............$ 5,000
JaneCo carries over the $15,000 disallowed Section 179 expense to 2014 .
However, in 2014 , JaneCo’s business taxable income limit is zero. The $5,000 carryforward related to qualified real property cannot be carried over to 2015 .
Instead, it is treated as real property placed in service on January 1, 2014 .
The remaining $10,000 is carried forward to 2015 .
C
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 Expired Provision Alert: For qualified assets placed in service before 2014, special (bonus) depreciation was available. With the exception of certain long production period property and aircraft
(see Long Production Period Property and Aircraft on Page 2-13), special depreciation is not available for property placed in service after 2013 unless legislation is enacted to extend it. This discussion is included in the event that special depreciation is extended to 2014.
Use the following table to determine whether property qualifies for special depreciation, Section 179 expensing or both.
pre-
Requirement
Must be placed in service between certain dates?
Can property be used in a rental activity?
Must be new property?
Section 179
Deduction
No
No
No
Special
Depreciation
Allowance
Yes
Yes
Annual limit (in addition to Section 280F limits that apply to passenger autos) on amount?
Can be acquired from a related party?
Does property qualify if used 50% or less for business?
Recapture required if business use of property falls to 50% or less?
Do qualified leasehold improvements qualify?
Yes
No
No
Yes
2
Yes 1
No
Yes
Yes
No 4
3
Yes 5
Yes
Does qualified restaurant property qualify?
Yes 5 No 6
Do qualified retail improvements qualify?
Yes 5 No 6
5
1 Assets converted from personal to business use can qualify, if they were new
2 when acquired after 2007.
Annual deduction limit and business taxable income limits apply. Also, $25,000
3 per vehicle limit applies to certain heavy passenger vehicles. [IRC §179(b)(5)]
Exception: Listed property used 50% or less for business does not qualify.
4 Exception: Recapture required if listed property use falls to 50% or less.
If placed in service in a tax year beginning in 2010– 2013 .
6 Exception: If property also meets the definition of qualified leasehold improvements, it qualifies for special depreciation allowance.
2014
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If an asset qualifies for both the special depreciation allowance and Section 179 expensing, consider the following:
• When determining whether the mid-quarter convention applies, assets expensed under Code Section 179 are not counted, but basis deducted as special depreciation is. Sometimes the mid-quarter convention can be avoided by claiming the Section 179 deduction on assets placed in service in the fourth quarter.
• The election out of special depreciation applies to an entire class of property placed in service during the tax year. The Section 179 election is made on an assetby-asset basis and taxpayers can elect to expense less than the full amount of an asset’s basis.
M
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The Section 179 election is made on an item-by-item basis for qualifying property by completing Part I of Form 4562 and filing the form with: [Reg. §1.179-5(a)]
• The original return filed for the tax year the property was placed in service (whether or not timely filed) or
• A timely filed amended return. If made on an amended return, the election must specify the items of Section 179 property to which the election applies and the part of the cost of each such item to be taken into account. The amended return must also include any resulting adjustments to taxable income.
Tax years beginning after 2002 and before 2015 .
The Section 179 expensing election (and the selection of the property expensed) can be revoked without IRS approval by filing an amended return.
The amended return must be filed within the time prescribed by law for the applicable tax year. However, once the election is revoked, the Section 179 deduction on that property cannot be reinstated; that is, the revocation itself is irrevocable. [IRC §179(c)(2)]
Tax years beginning after 2014 .
The ability to revoke the expense election without IRS approval is only available for tax years beginning after 2002 and before 2015 . For tax years beginning in 2014 and later, the election cannot be revoked without IRS consent, unless
Congress enacts legislation extending the prior rule. [IRC §179(c)(2)]
 Note: Only the revocation of the expense election is irrevocable. If a taxpayer did not elect to expense an asset (or elected to expense only a portion of it) for a particular tax year, an amended return can still be filed to claim a deduction for the amount not expensed. This is not treated as a revocation of the prior election.
[Reg. §1.179-5(c)(2); Rev. Proc. 2008-54]
S
179 R
The Section 179 deduction is recaptured as ordinary income if, in any year during the property’s recovery period (see Assigning the Recovery Period on Page 2-2), the percentage of business use drops to 50% or less [Reg. §1.179-1(e)(1)]. The basis of the underlying property is increased by the recaptured amount.
The amount recaptured equals:
• The 179 deduction claimed minus
• The depreciation that would have been allowable on the Section 179 deduction beginning with the year placed in service and including the year of recapture.
Common situations where the recapture rule applies include when an asset is converted from use in a trade or business to:
• Personal use or
• Use for the production of income (for example, investment use).
Exceptions. Although recapture generally applies when business use falls to 50% or less, it does not apply to an auto or other listed property because listed property is subject to separate recapture rules under Code Section 280F. [See Recapturing Excess
Depreciation (Listed Property) on Page 6-4.] Nor does it apply when the property is sold, but the 179 deduction is treated as depreciation when calculating ordinary income recapture due to the sale. See Section 1245 Depreciation Recapture on Page 8-3.
Example: On January 1, 2013, Sal purchased $10,000 of used video equipment for exclusive use in his advertising business. He expensed the $10,000 under
Code Section 179. On June 15, 2014, Sal purchased new video equipment for use in his business and converted the equipment purchased in 2013 to personal use property.
The recapture is calculated as follows:
Section 179 deduction claimed (2013) ............................................ $10,000
Minus: Allowable depreciation
(instead of Section 179 expensing)
2013 ($10,000 × 100% business use × 20%) ........... $ 2,000
2014 [$10,000 × 100% business use × 32%
× 50% (half-year convention)] ........................ 1,600 < 3,600>
2014—Recapture amount ............................................................... $ 6,400
Note: Basis in the equipment purchased in 2013 is increased by the $6,400 of recapture income.
When the qualified business use of an asset decreases to 50% or less, the recapture amount is first entered on Form 4797, Part
IV. This amount is then reported as income on the form where the deductions were originally claimed. If the Section 179 deduction was originally claimed on Schedule C or F, the recaptured amount is subject to SE tax.
Taxpayers who place Section 179-eligible property in service in certain targeted areas may qualify for higher expensing limits. If property that qualified for additional expensing ceases to be used substantially for business in the targeted area, the additional expensing amount must be recaptured. See Recapture of Additional
Expensing on Page 5-2.
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
Business Vehicles—Quick Facts ............................ Page 6-1 Leased Vehicles .................................................... Page 6-10
Special Rules for Listed Property............................ Page 6-2
Business Use Requirement for Listed Property ...... Page 6-3
Alternative Motor Vehicle Credit............................ Page 6-11
Credits for Plug-In Vehicles................................... Page 6-12
Lease Income Inclusion Table—Electric Autos ..... Page 6-13 Lessee’s Income Inclusion Amount—Listed
Property Other Than Autos ................................... Page 6-4 Lease Income Inclusion Tables A & B—Property
Other Than Passenger Automobiles ................... Page 6-13 Limits on Vehicle Depreciation ................................ Page 6-5
Special Depreciation and the
Section 280F Limit ................................................ Page 6-7
Lease Income Inclusion Tables—Passenger Autos
Leased in 2014 and 2013 ................................... Page 6-14
Section 179 Expensing Rules ................................. Page 6-8 Lease Income Inclusion Tables—Passenger Autos
Leased in 2012 and 2011 ................................... Page 6-15
Standard Mileage Rates vs. Actual Costs ............... Page 6-9
For business vehicles placed in service
Passenger Autos—Unloaded Gross Vehicle Weight 6,000 lbs. or Less
Depreciation limits (Section 280F limits) 1 , 2,3
Placed in service year if special depreciation allowed
Placed in service year if no special depreciation allowed
Second-year limit
Third-year limit
All years thereafter
Leased auto income inclusion applies when FMV exceeds
2014
$ 11,160
3,160
5,100
3,050
1,875
18,500
2013
$ 11,160
3,160
5,100
3,050
1,875
19,000
2012
$ 11,160
3,160
5,100
3,050
1,875
18,500
2011
$ 11,060
3,060
4,900
2,950
1,775
18,500
2010
$ 11,060
3,060
4,900
2,950
1,775
18,500
2009
$ 10,960
2,960
4,800
2,850
1,775
18,500
Depreciation limits (Section 280F limits) 1,2,3
Trucks and Vans—Loaded Gross Vehicle Weight 6,000 lbs. or Less
Placed in service year if special depreciation allowed
Placed in service year if no special depreciation allowed
Second-year limit
Third-year limit
All years thereafter
Leased auto income inclusion applies when FMV exceeds
$ 11,460
3,460
5,500
3,350
1,975
19,000
$ 11,360
3,360
5,400
3,250
1,975
19,000
$ 11,360
3,360
5,300
3,150
1,875
19,000
$ 11,260
3,260
5,200
3,150
1,875
19,000
$ 11,160
3,160
5,100
3,050
1,875
19,000
$ 11,060
3,060
4,900
2,950
1,775
18,500
Vehicles Not Subject to Depreciation Limits
Autos with unloaded gross vehicle weight (GVW) more than 6,000 lbs., trucks and vans with loaded GVW more than 6,000 lbs., and qualified nonpersonal-use vehicles are not subject to the Code Section 280F depreciation limit.
Heavy Vehicles—Over 6,000 lbs. (unloaded GVW for autos, loaded GVW for trucks and vans) if GVW 14,000 lbs. or less
Section 179 expensing limit—per vehicle 4 $ 25,000 $ 25,000 $ 25,000 $ 25,000 $ 25,000
Depreciation limit (Section 280F limit) N/A N/A
Standard Mileage Rates
N/A N/A N/A
Business miles 56¢ 56.5¢ 55.5¢
51¢: 1/1–6/30
55.5¢:
7/1-12/31
50¢
Depreciation component of business standard mileage rate
Charitable miles
Medical or moving miles
Description
(Vehicles Placed in Service in 2014)
Qualifies for 50% special depreciation
Doesn’t qualify for special depreciation
Auto
$ 18,600
$ 15,800
22¢
14¢
23.5¢
Basis equals or exceeds 5
23¢
14¢
24¢
Truck or
Van
$ 19,100
$ 17,300
$ 25,000
N/A
55¢
23¢
14¢
23¢
22¢
14¢
19¢: 1/1–6/30
23.5¢:
7/1–12/31
23¢
14¢
16.5¢
21¢
14¢
24¢
1 If any personal use, the limits must be reduced to reflect actual
2 business/investment-use percentage.
The limits are not reduced if the vehicle is used for less than a full year, but are reduced for a short tax year. See Computing
Depreciation in a Short Tax Year on Page 2-11.
3 This limit applies to the sum of any special depreciation allowance (if
4 available), MACRS depreciation and Section 179 expense claimed.
Overall limit on Section 179 expensing also applies.
5 Assumes half-year convention applies.
6 The special depreciation allowance is not available for business vehicles placed in service after 2013 unless legislation is enacted that extends the provision.
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Description
Car—GVW (unloaded) up to 6,000 lbs.
Truck or van—GVW (loaded) up to 6,000 lbs.
• Car—GVW (unloaded) over 6,000 lbs. but
GVW not over 14,000 lbs.
• Truck or van—GVW (loaded) over 6,000 lbs. but not over 14,000 lbs.
Vehicles described in the preceding row that:
• Are designed to seat more than nine passengers behind the driver seat (for example, a hotel shuttle van),
• Have an open cargo area or covered box that is at least six feet long and not readily accessible from the passenger compartment (for example, a pick-up with full-size cargo bed) or
• Have an integral enclosure fully enclosing the driver compartment and load carrying device, do not have seating behind the driver’s seat and have no body section protruding more than 30 inches ahead of the windshield (for example, a delivery van).
Truck or van—GVW (loaded) over 14,000 lbs.
§280F
Depreciation
Limit 1
$ 3,160 4
$ 3,460 4
N/A
N/A
Maximum
§179
Deduction
$ 3,160 4
$ 3,460 4
$ 25,000 2
$ 500,000
N/A $ 500,000
1
2
3
First year limit; reduce by any Section 179 expense claimed.
Per vehicle limit. Also subject to annual overall limit ( $500,000 for 2014).
4
Annual limit for all assets expensed.
Plus $8,000 if vehicle qualifies for special (bonus) depreciation.
See Depreciating Vehicles Received in a Trade on Page 9-8.
When depreciation is limited due to the Section 280F limits, a vehicle will have unrecovered basis at the end of the recovery period. This basis can be depreciated until the car’s full depreciable basis is recovered (assuming the vehicle continues to be used for business or investment). However, depreciation deductions after the recovery period ends are subject to the Section 280F limit
(adjusted for business/investment use percentage).
After the normal recovery period, unrecovered basis must be determined to compute the depreciation deduction each year. Unrecovered basis is the vehicle’s cost or other basis reduced by any clean-fuel vehicle deduction, electric vehicle credit, depreciation and Section 179 deductions (considering the Section 280F limits) that would have been allowable if the taxpayer had used the car
100% for business/investment use. [IRC §280F(d)(8)]
N Observation: This rule prevents taxpayers from depreciating the personal-use portion of the vehicle after the recovery period ends.
Example: In May 2008, Jim bought and placed in service a used luxury car costing $31,500. The car was five-year MACRS property. Jim did not claim a
Section 179 deduction, and, as used property the car did not qualify for a special depreciation allowance. He used the car exclusively for business during the recovery period (2008 through 2013). His depreciation deductions are as follows:
Year MACRS
Depreciation
MACRS
Depreciation
Section 280F
Limit
Depreciation
Allowed
Percentage Amount
2008...................20% ...................$ 6,300 ...........$ 2,960 ..............$ 2,960
2009 ..................32 ........................10,080 ...............4,800 ..................4,800
2010 ...............19.2 ..........................6,048 ...............2,850 ..................2,850
2011 ............. 11.52 ..........................3,629 ...............1,775 ..................1,775
2012 ............. 11.52 ..........................3,629 ...............1,775 ..................1,775
2013................5.76 ........................ 1,814 ...............1,775 ................ 1,775
Total ..............................................$31,500 .......................................$15,935
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At the end of 2013, Jim’s unrecovered basis in the car is $15,565 ($31,500
– $15,935). If in 2014 and later years he continues to use the car 100% for business, he can deduct each year the lesser of $1,775 or his remaining unrecovered basis.
Variation: Assume Jim’s business use of the car was only 60%. Then, the
Section 280F limits (and thus his depreciation deductions) would have been reduced each year. However, when figuring his unrecovered basis in the car after 2013, he must still reduce his basis by the depreciation allowable as if the business use had been 100%. So, Jim’s unrecovered basis at the beginning of 2014 would still be $15,565 ($31,500 – $15,935).
If his business use remained at 60%, Jim’s depreciation expense for 2014 would be the lesser of $1,065 ($1,775 × 60%) or $9,339 (60% of his remaining unrecovered basis of $15,565). However, even though he deducts $1,065 of depreciation, his unrecovered basis is reduced by $1,775 (the depreciation deduction that would be allowed if 100% business use).
U Caution: Depreciation cannot be claimed after the recovery period ends for listed property other than passenger automobiles.
There is no unrecovered basis at the end of the recovery period because the taxpayer is considered to have used the property 100% for business and investment purposes during all of the recovery period.
S
D
S
280f l
For assets purchased and placed in service after September 8, 2010 and before 2012, the special depreciation allowance (if available) was 100% of the asset’s depreciable basis. See Special (Bonus)
Depreciation on Page 2-12.
When depreciation is limited under Code Section 280F, the amount that cannot be currently deducted becomes unrecovered basis, which cannot be deducted until after the end of the vehicle’s recovery period [IRC §280F(a)(1)(B)]. Unrecovered basis can be deducted after the end of the recovery period, subject to the
Section 280F limit for that year (or years). See Depreciation After
Recovery Period Ends in the previous column).
Under the unrecovered basis rule, claiming 100% special depreciation results in all of the vehicle’s basis in excess of the first year Section
280F limit becoming unrecovered basis, which cannot be depreciated until after the end of the vehicle’s recovery period. To mitigate this result, the IRS allows taxpayers who claimed 100% special depreciation that was limited by Code Section 280F to elect a safe-harbor accounting method for computing depreciation and unrecovered basis for years after the placed-in-service year. (Rev. Proc. 2011-26)
Under the safe-harbor rule, taxpayers figure depreciation after the placed-in-service year as if the special depreciation allowance in the first year had been 50% rather than 100%. Note: If in the placed-in-service year there was no unrecovered basis (under the special accounting rule), taxpayers cannot use the optional depreciation tables for later years. Instead, they must compute 200% declining balance depreciation on the adjusted depreciable basis.
Example: In 2011, Matt purchased a new car for $20,000 that he used 100% for business. The car qualified for the 100% special depreciation allowance, but Matt’s 2011 depreciation was limited to $11,060 (the Section 280F limit).
Matt adopted the special accounting rule. For 2012 and later, Matt is treated as if he claimed 50% special depreciation for figuring his unrecovered basis and depreciation deductions:
Deemed 2011 depreciation ($20,000 × 50%) + ($10,000 × 20%) .......... $12,000
Actual 2011 depreciation ......................................................................< 11,060>
Unrecovered basis .................................................................................$ 940
The $940 unrecovered basis is recovered beginning in 2017, subject to the
280F limit then in effect.
For 2014, the car’s depreciation is $1,152 (11.52% optional table percentage ×
$10,000 unadjusted depreciable basis if 50% depreciation had been claimed in
2011). Because this amount is less than the 280F limit ($1,775) Matt deducts the full $1,152 in 2014.
2014 Tax Year | Depreciation Quickfinder ® Handbook 6-7

Variation: Assume the same facts except the car cost $18,400. For 2011, Matt’s
100% special depreciation allowance was limited to $11,060 (the Section 280F limit). Under the safe-harbor accounting method, Matt is deemed to have claimed 50% special depreciation for determining the car’s unrecovered basis and its remaining adjusted depreciable basis, as follows:
Deemed 2011 depreciation ($18,400 × 50%) + ($9,200 × 20%) ........... $ 11,040
Actual 2011 depreciation .......................................................................< 11,060>
Unrecovered basis (cannot be less than zero) ..................................... 0
Matt cannot use the optional depreciation tables to compute depreciation on his car for years after 2011. Instead, he computes depreciation using the 200% declining balance method (assuming the half-year convention applies) as follows:
Beginning unadjusted basis ...................................................................$18,400
Less: 2011 actual depreciation ............................................................< 11,060>
2012 and 2013 actual depreciation ($2,936 + $1,762) 1 ........................ < 4,698>
Adjusted basis at 12/31/13 ..................................................................$ 2,642
200% declining balance rate ................................................................ × 40%
2014 depreciation ................................................................................$ 1,057
Because this amount is less than the 280F depreciation limit ($1,775) Matt deducts $1,057 as depreciation for 2014.
1 2012 depreciation is computed by multiplying the adjusted basis for depreciation at 12/31/11 ($18,400 – $11,060 = $7,340) by the 40% DDB percentage. 2013 depreciation of $1,762 is computed the same way.
Electing the safe-harbor accounting method.
This method is elected by applying it to deduct depreciation on a vehicle subject to the Section 280F limits for the first year after the placed-in-service year. (Rev. Proc. 2011-26)
S
179 e
R
Certain heavy passenger vehicles are subject to a $25,000 limit on the Section 179 deduction [IRC §179(b)(5)]. The $25,000 limit is not pro-rated for vehicles with less than 100% business use.
Any four-wheeled vehicle primarily designed to carry passengers over public streets, roads or highways that is not subject to the Section
280F depreciation limit and is rated at 14,000 pounds gross vehicle weight or less is subject to the $25,000 limit.
Thus, trucks and vans with a loaded GVW of more than 6,000 pounds and that are rated at no more than 14,000 pounds GVW are subject to the $25,000 expense limit. Also, autos with an unloaded weight over 6,000 pounds that are rated at 14,000 pounds
GVW or less are subject to the limit.
N Observation: The Code calls the vehicle described on Page
6-8 an SUV, but the $25,000 limit can apply to any vehicle that meets the definition, such as a pick-up truck or cross-over vehicle that is not subject to the Section 280F depreciation limit.
The $25,000 Section 179 limit is per vehicle (not per taxpayer). Therefore, a taxpayer may have more than one $25,000 limit apply if more than one vehicle subject to the limit is placed in service during the year. However, the total Section
179 deductions cannot exceed the annual overall limit ( currently $25,000 for 2014).
N Observation: For 2014, the Section 179 per vehicle expens-
However, in prior years, the annual overall limit has exceeded this amount. Tax professionals should watch for possible legislative developments that raise the annual overall limit .
Exception.
See Deduction Limits for Vehicles Placed in Service in
2014 on Page 6-7 for three classes of vehicles that meet the weight requirements for heavy vehicles but are not subject to the $25,000 per vehicle limit on the Section 179 deduction. Note that most pickup trucks with a cargo bed that is at least six feet long will escape both the Section 280F limit on depreciation (since their loaded GVW is over 6,000 pounds) and the $25,000 limit on Section 179 expensing.
The following worksheet calculates depreciation for a passenger auto placed in service in 2014 under the half-year convention. In each situation, the vehicle is listed property with a five-year recovery period and is subject to the Section 280F depreciation limits.
1) Business use percentage.
2) Investment use percentage.
3) Business/investment use percentage.
4) Cost or other basis of vehicle.
5) Depreciation method.
6) Depreciation rate (see First-Year MACRS Depreciation Rates for Vehicles on Page 6-9).
7) Section 280F depreciation limit (see Business Vehicles—Quick Facts on Page 6-1).
8) Maximum depreciation deduction. Multiply line 7 by line 3.
9) Section 179 deduction claimed this year (not more than line 8). Enter -0- if this is not the year vehicle was placed in service or business use percentage (line 1) is 50% or less.
10) Business/investment cost. Multiply line 4 by line 3.
11) Section 179 deduction claimed in the year vehicle placed in service.
12) Tentative basis for depreciation. Subtract line 11 from line 10.
13) Maximum regular depreciation allowed. Subtract line 9 from line 8.
14) Tentative MACRS depreciation deduction. Multiply line 12 by line 6.
15) Enter lesser of the amount on line 13 or 14.
16) Total depreciation for the year (including Section 179 deduction). Add line 15 and line 9.
Used Ford
55%
20%
75%
$ 12,000
$
200% DB
20%
3,160
2,370
713
9,000
713
8,287
1,657
1,657
1,657
2,370
New Chevy
55%
20%
75%
$ 12,000
200% DB
60%
$ 11,160
8,370
7,425
9,000
7,425
1,575
945
945
945
8,370
$
New Audi
40%
0%
40%
$ 34,000
SL
10%
3,160
1,264
0
13,600
0
13,600
1,264
1,360
1,264
1,264
Line 4 —The cost of the vehicle is reduced for any adjustments to basis, such as the clean fuel deduction or alternative motor vehicle credit.
Line 5 —For the Audi (listed property used 50% or less for business), straight-line is the only method available.
available for assets placed in service in 2014.
Line 6 —Special depreciation allowance expired, generally, for assets placed in service after 2013 . However, if subsequently renewed in its former form by legislation, the allowance would not be available for the Ford because it is used, not new, or for the Audi because it is used 50% or less for business.
Line 9 —Business use must be more than 50% to claim any Section 179 expense. Amount is calculated to optimize first-year Section 179 expensing. See Formula to
Optimize First-Year Expense on a Vehicle on Page 6-9.
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2014
Example: Fred was considering the purchase of a full-sized Ford F150 pickup truck in 2013 (loaded GVW exceeds 6,000 but not 14,000 pounds), to be used
100% in Fred’s business. He considered two alternatives, both costing around
$40,000. One version had four doors and a 5.5-foot pickup box, while the other version, also with four doors, had a 6.5-foot pickup box. If Fred purchased the truck with the 5.5-foot pickup box, his Section 179 deduction for that truck would be limited to $25,000. If he purchased the truck with the 6.5-foot pickup box, the $25,000 per vehicle limit on Section 179 expensing would not apply, so
Fred would be able to elect a Section 179 deduction for the truck’s entire cost in 2013 when the annual overall Section 179 deduction limit was $500,000.
The Section 179 expense election is available only if an auto, truck or van that is listed property is used more than 50% for business in the year it is purchased and placed in service. Any amount claimed under Code Section 179 reduces the vehicle’s basis for computing regular MACRS depreciation. Also, the total Section
179 expense plus regular MACRS depreciation for a passenger automobile may not exceed the Section 280F limit for that year.
When a vehicle’s first year depreciation expense is less than the Section 280F limit, electing a Section
179 deduction for the vehicle (assuming the vehicle is eligible) can maximize the first year deductions (up to the
280F limit—for 2014, $3,160 for autos and $3,460 for trucks and vans).
$11,160
See the Section 280F Limit Applies When table on
Page 6-1 to determine whether a vehicle’s first-year depreciation is below the 280F limit.
$11,460
if special depreciation applies; $3,160 and $3,460, respectively, if it does not apply.
Section 179 Deduction =
[(Section 280F Limit × Combined Business/
Investment Use Percentage)] – [(First-Year
Depreciation Rate 1 ) × (Combined
Business/Investment
Use Percentage) × (Asset Cost)]
1 – (First-Year Depreciation Rate 1 )
1 See First-Year MACRS Depreciation Rates for Vehicles in the next column.
Example #1: Mark purchases a used car in 2014 for $12,500. He uses the vehicle
100% for business and wants to maximize his Section 179 and depreciation deductions. Mark’s optimized Section 179 election is calculated as follows:
$825 =
($3,160 × 100%) – (20% × 100% × $12,500)
80%
Total Depreciation for 2014 (Proof):
Section 179 deduction .....................................................................
MACRS depreciation ($12,500 – $825) × 20% ...............................
Total depreciation (including Section 179 deduction) ......................
$ 825
2,335
$ 3,160
Example #2: Assume the same facts as Example #1 except that Mark uses the vehicle 60% for business and 15% for investment purposes (75% total deductible use), so his Section 280F limit is $2,370 ($3,160 × 75%). Mark’s optimized Section 179 election is calculated as follows:
$619 =
($3,160 × 75%) – (20% × 75% × $12,500)
80%
Total Depreciation for 2014 (Proof):
Section 179 deduction ......................................................................
MACRS depreciation [($12,500 × 75%) – 619] × 20% .....................
Total depreciation (including Section 179 deduction) .......................
$ 619
1,751
$ 2,370
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Applicable Convention
50% Special
Depreciation
Allowance 1
No Special
Depreciation
Allowance
Straight-
Line
Method 2
HY
MQ (placed in service in 1st quarter)
60.0%
67.5
20%
35
10.0%
17.5
MQ (placed in service in 2nd quarter)
MQ (placed in service in 3rd quarter)
MQ (placed in service in 4th quarter)
62.5
57.5
52.5
25
15
5
12.5
7.5
2.5
1
2
The 50% special depreciation allowance is generally not available for 2014 unless legislation is enacted that extends the provision.
Required when business use is 50% or less.
S
M
R
.
A
C
See Comparison of Standard Mileage Rate and Actual Cost Methods (2014) on Page 6-10 for an overview of the methods.
Owned vehicles.
Taxpayers must elect to use the standard mileage method in the year the car is placed in service for business purposes. In later years, taxpayers can switch to the actual expense method. But if a switch to the actual expense method occurs, the straight-line method must be used to depreciate the vehicle based on its remaining useful life. The basis must be reduced by the depreciation assumed while using the standard mileage method.
 Note: Starting in 2011, the standard mileage rate is available for autos used for hire, such as taxicabs. (Rev. Proc. 2010-51)
Adjustment to basis.
For 2014, 22¢ is the deemed depreciation rate for each mile claimed under the standard mileage rate.
(Notice 2013-80)
 Note: The vehicle’s basis cannot be reduced below zero. When the basis of a vehicle is depreciated to zero, deductions continue at the standard rate per mile for the year, but no additional basis adjustments are made.
Example: Bob used the standard mileage rate method to report expenses from his used car purchased on August 2, 2013, for $18,000. He drove 9,000 and 20,000 business miles during 2013 and 2014, which represented 80% business use. On December 24, 2014, Bob sells the car.
Bob’s adjusted basis for a sale or trade:
Total 80%
Business
Original cost or basis ......................... $18,000
Less: Depreciation component of
$ 14,400 standard mileage rate:
2013 (9,000 × 23¢ per mile) .............. < 2,070 > < 2,070 >
2014 (20,000 × 22¢ per mile) ............ < 4,400 > < 4,400 >
Adjusted basis of car ......................... $ 11,530 $ 7,930
Bob’s gain or loss on the sale of the car for $12,500:
20%
Personal
$ 3,600
0
0
$ 3,600
Total 80%
Business
Sales proceeds .................................. $12,500 $ 10,000
Adjusted basis ................................... < 11,530 > < 7,930 >
Gain (loss) on sale ............................. $ 970 $ 2,070
20%
Personal
$ 2,500
< 3,600 >
< 1,100 >
The $2,070 gain on the business portion is a taxable Section 1231 gain
(subject to Section 1245 recapture) and is reported on Form 4797. The
$1,100 loss on the personal portion is a nondeductible personal loss and is not reported on Bob’s return. If a gain had been realized on the personal portion, it would have been reported as long-term capital gain on Form 8949.
2014 Tax Year | Depreciation Quickfinder ® Handbook 6-9

The IRS has been instructed to issue regulations on the rules for recapturing the credits for plug-in vehicles that cease to qualify for the credits [IRC §30B(h)(8)], except that no recapture will be required if the vehicle ceases to qualify because it is converted to a qualified plug-in electric drive motor vehicle. As of the date of this publication, no regulations have been issued.
C
p
-i
v
Taxpayers can claim a credit for each new qualifying vehicle purchased for use or for lease, but not for resale. The credit amount ranges from $2,500 to $7,500. The portion of the credit attributable to the vehicle’s business-use percentage is treated as part of the taxpayer’s general business credit. The remainder is a nonrefundable personal credit that can offset both regular tax and AMT. (IRC §30D)
Qualifying vehicles. These are new four-wheeled plug-in electric vehicles manufactured primarily for use on public streets, roads and highways that meet certain technical requirements.
However, the following do not qualify:
1) Vehicles manufactured primarily for off-road use (such as golf carts).
2) Vehicles weighing 14,000 pounds or more.
3) Low-speed vehicles.
Manufacturer’s certification. The IRS will acknowledge a manufacturer’s (or in the case of a foreign vehicle manufacturer, its domestic distributor’s) certification that a vehicle meets the standards to qualify for the credit. Taxpayers may rely on such a certification.
(Notice 2009-89)
The credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles manufactured by that manufacturer have been sold for use in the
U.S. (determined cumulatively for sales after 2009). As of publication date, no manufacturers had reached that threshold.
 Note: A vehicle is considered acquired on the date when title to that vehicle passes under state law. (Notice 2009-89)
Model Year
1
Vehicle Description
2014
2012
2012
2011, 2012
2014
2014
2014
2013
2013
2013
2013
2012, 2013, 2014
2014
2014
Accord Plug-In Hybrid
AMP GCE Electric Vehicle
AMP MLE Electric Vehicle
Azure Dynamics Transit Connect Electric
Vehicle
BMW i3 Sedan with Ranger Extender
BMW i3 Sedan
BMW i8
Boulder Electric Delivery Van DV-500
Boulder Electric Shuttle DV500
Boulder Electric Flat Bed DV-500
Boulder Electric Service Body DV-500
BYD e6 Electric Vehicle
Cadillac ELR
Chevrolet Spark EV
Credit
$ 3,626
7,500
7,500
7,500
7,500
7,500
7,500
7,500
7,500
7,500
7,500
3,793
7,500
7,500
6-12 2014 Tax Year | Depreciation Quickfinder ® Handbook
2011, 2012,
2013, 2014
2010, 2012
2010
2010
2010
2011, 2012
2011, 2012
2013, 2014
2012
2012, 2013, 2014
2013, 2014
2013, 2014
2013
2012, 2014
2011, 2012,
2013, 2014
2015
2014
2011
2008, 2009,
2010, 2011
2012, 2013, 2014
2011
2012, 2013, 2014
2012, 2013, 2014
2014
2014
2014
2014
2011
2014
Chevrolet Volt
CODA Sedan
Electric Mobile Cars (EMC) Model E36
7 Passenger Wagon
EMC Model E36t Pick-up Truck
EMC Model E36v Utility Van
Electric Vehicles International (EVI) EVI-MD
(Medium Duty) Electric truck
EVI EVI-WI (Walk-In) Electric truck
Fiat 500e
Fisker Karma Sedan
Ford Focus Electric
Ford C-MAX Energi
Ford Fusion Energi
Mercedes-Benz smart Coupe/Cabrio EV
Mitsubishi i-MiEV
Nissan Leaf
Porsche 918 Spyder
Porsche Panamera S E Hybrid smart fortwo Electric Drive Vehicle
Tesla Roadster
Tesla Model S Vehicle
Think City EV
Toyota Prius Plug-in Electric Drive Vehicle
Toyota RAV4 EV
VIA 2500 Extended Range Electric Passenger
Van
VIA 1500 Extended Range Electric Truck 4WD
(All body styles)
VIA 2500 Extended Range Electric Cargo Van
VIA 1500 Extended Range Electric Truck 2WD
(All body styles)
Wheego LiFe Electric Vehicle
Zenith Electric Van
7,500
7,500
7,500
7,500
7,500
7,500
7,500
7,500
7,500
7,500
4,007
4,007
7,500
7,500
7,500
3,667
4,751
7,500
7,500
7,500
7,500
2,500
7,500
7,500
7,500
7,500
7,500
7,500
7,500
1 Current as of publication date. Check IRS website for updates. Search for “Plug-in electric drive motor vehicle.”
The credit for plug-in electric drive motor vehicles is claimed on
Form 8936. The portion of the credit attributable to business/investment use of the vehicle is part of the general business credit.
The remainder is a personal nonrefundable credit that can offset regular tax and AMT. It is reported on line 54 of Form 1040 (check box c and write “8936” in the space next to that box). Any part of the personal-use portion of the credit that cannot be used is lost.
It cannot be carried over to other years.
 Expired Provision Alert: The credit for purchasing qualified two- or three-wheeled plug-in electric vehicles expired on December 31, 2013. It will not be available in 2014 unless legislation is enacted that extends the provision.
A credit for purchasing qualified two- or three-wheeled plug-in electric vehicles was available for vehicles purchased in 2012 and
2013. Among other criteria, the vehicle must be capable of achieving a speed of 45 miles per hour or greater and be manufactured for use on public roads. The credit equals 10% of the vehicle’s cost (limited to $2,500). [IRC §30D(g)]
Congress did not extend the credit with the Tax Increase Prevention
Act of 2014; so the credit is not available for 2014.
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
What Is Real Property? ........................................... Page 7-2
Residential Rental Property .................................... Page 7-2
Open-Air Parking Structures .................................. Page 7-2
Billboards ................................................................ Page 7-3
Gas Stations and Convenience Stores ................... Page 7-3
Farm Buildings ........................................................ Page 7-3
Business Use of Home ........................................... Page 7-4
Converting a Residence to Rental Property............ Page 7-4
Effect of Rental or Business Use on Sale of
Residence............................................................. Page 7-5
Land Improvements ................................................ Page 7-5
Energy Efficient Commercial Building Deduction .... Page 7-7
Builders of Energy Efficient New Homes Credit ...... Page 7-8
Nonbusiness Energy Property Credit...................... Page 7-8
Residential Energy Efficient Property Credit ........... Page 7-9
Leasehold Improvements........................................ Page 7-9
Finding Personal Property Included in a
Building’s Cost (Cost Segregation) ..................... Page 7-11
Structural Component vs. Personal Property........ Page 7-12
IRS View of Cost Segregation Studies ................. Page 7-13
Quick List—Court Cases on Real vs.
Personal Property ............................................... Page 7-15
Guide to Assets Used in Casino/ Hotel Industry ... Page 7-18
Guide to Assets Used in the Restaurant
Industry ............................................................... Page 7-23
Guide to Assets Used in a Retail Business ........... Page 7-27
Guide to Assets Used in the
Biotech/Pharmaceutical Industry ........................ Page 7-31
Guide to Assets Used in the Auto Dealership
Industry ............................................................... Page 7-37
IRS Evaluation of Cost Segregation Studies ........ Page 7-43
Description Definition
1
Authority
IRC §168(e)(2)
Section
1245 /
1250
1250 Residential Rental
Property
Nonresidential Real
Property 3
3
A building or structure if at least 80% of the gross rents are from a house or apartment (including a mobile home). Does not include a hotel, motel or other building where more than half of the units are used on a transient basis.
IRC Section 1250 property that is not (1) residential rental property or (2) property with a class life of less than 27.5 years.
Includes items such as an office building, store or warehouse.
Land Improvements Depreciable improvements to land, whether classified as
Section 1245 or Section 1250 property. See Land Improvements on Page 7-5 for when land improvements are depreciable.
Examples include sidewalks, roads, canals, drainage facilities, sewers, wharves and docks, bridges, fences, landscaping and radio and TV transmitting towers.
See Billboards on Page 7-3.
Billboards classified as Section 1245
Property
Billboards classified as Section 1250
Property
See Billboards on Page 7-3.
See Open-Air Parking Structures on Page 7-2.
Open-Air Parking
Structures
Qualified Leasehold
Improvements
Qualified Restaurant
Property
Qualified Retail
Improvement Property
Retail Motor Fuels
Outlet
Farm Buildings
See Qualified Leasehold Improvements definition and effective dates.
and effective dates.
definition and effective dates.
Except single-purpose agricultural and horticultural structures.
See Farm Buildings on Page 7-3.
See Farm Buildings on Page 7-3.
on Page 7-9 for
See Qualified Restaurant Property on Page 7-10 for definition
See Qualified Retail Improvement Property on Page 7-10 for
See Gas Stations and Convenience Stores on Page 7-3.
Single Purpose
Agricultural and
Horticultural
Structures
IRC §168(e)(2) 1250
Regular Tax
Recovery Period /
Method
27.5-year / SL
39-year / SL 4
Rev. Proc. 87-56
(Asset Class 00.3)
Both 15-year / 150% DB If Section 1245 property:
15-year / 150% DB;
If Section 1250 property:
15-year / SL
20-year
1245 15-year / 150% DB 15-year / 150% DB 20-year Rev. Rul. 80-151,
Rev. Proc. 87-56
(Asset Class 57.1)
Rev. Rul. 80-151,
Rev. Proc. 87-56
(Asset Class 57.1)
1250
IRC §168(e)(2) 1250
15-year / 150% DB
39-year / SL 4
15-year / SL
39-year / SL
20-year
40-year
IRC §168(b)(3) and (e)(3)(E)
IRC §168(b)(3) and (e)(3)(E)
IRC §168(b)(3) and (e)(3)(E)
1250
1250
1250
15
15
15
-year / SL
-year / SL
-year / SL
4, 5
4, 5
4 ,5
IRC §168(e)(3)(E) 1250 15-year / 150% DB
AMT
Recovery Period /
Method 2
27.5-year / SL
39-year / SL
15 -year / SL
15 -year / SL
15 -year / SL
15-year / SL
ADS
Recovery
Period
40-year
40-year
39 -year
39 -year
39 -year
20-year
Rev. Proc. 87-56
(Asset Class 01.3)
1250 20-year / 150% DB 20-year / SL 25-year
IRC §168(e)(3)(D) 1245 10-year / 150% DB 10-year / 150% DB 15-year
1
2
3
4
5
This table doesn’t cover all types of real property used in specific activities, which may be assigned a shorter recovery period under Rev. Proc. 87-56 (see Tab 12).
Assumes asset placed in service after 1998. If placed in service before 1999, AMT depreciation is over the ADS recovery period. [IRC §168(g) and 56]
See Residential Rental Property on Page 7-2.
31.5-year / SL if placed in service before 5/13/93.
15-year / SL if placed in service at certain times before 2014—see discussion referenced in Definition
column.
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Depreciable real property includes buildings and their structural components, other inherently permanent structures and certain land improvements. It does not include tangible personal property.
Most depreciable realty is Section 1250 property. However, some real property is classified as Section 1245 property and thus may qualify for the Section 179 deduction. Also, for real property classified as Section 1245 property, all depreciation is recaptured when the property is sold. In contrast, for Section 1250 property placed in service after 1986, depreciation is recaptured only to the extent the amount claimed was greater than straight-line. See Tab 8 for more on depreciation recapture.
Generally, Section 1250 property does not qualify for Section 179 expensing. However, see Qualified Real Property on Page 5-8 for an exception for certain real property placed in service in tax years beginning in 2010– 2013 . 2014
 Expired Provision Alert: Section 179 expensing for qualified real property is not available for property placed in service in tax years beginning after 2013 unless legislation is enacted to extend it. Tax professionals should watch for developments.
2014
 Expired Provision Alert: Certain new property placed in service during 2008– 2013 qualifies for a special (bonus) depreciation allowance [IRC §168(k)]. See Special (Bonus) Depreciation on
Page 2-12 for details.
Although special depreciation has expired for property placed in service after 2013 (except for certain Long Production Period
Property and Aircraft as discussed on Page 2-13), this discussion is included in the event that special depreciation is extended to 2014.
Generally, to be eligible, property must have a recovery period of
20 years or less, so most real property will not qualify for special depreciation. However, the following real property has a recovery period of 20 years or less and therefore can qualify for special depreciation (provided all other requirements are met):
• Billboards (see Billboards on Page 7-3).
• Retail fuel outlets (see Retail motor fuels outlet on Page 7-3).
• Farm buildings and single purpose agricultural and horticultural structures (see Farm Buildings on Page 7-3).
• Land Improvements, such as sidewalks, fences and roads (see
Land Improvements on Page 7-5).
• Qualified leasehold improvement property (see Qualified Leasehold Improvements on Page 7-9).
In addition, real property used in specific activities may be assigned a recovery period of 20 years or less under Revenue Procedure 87-56.
While a building’s structural components are considered part of the building and thus, Section 1250 property, structures that are essentially items of machinery or equipment are not. Likewise, structures that house an asset used as an integral part of an activity should not be treated as a building if the structure’s use is closely related to the asset’s use. This may be the case if:
1) It is expected that the structure will be replaced when the asset it initially houses is replaced,
2) The structure is specially designed to withstand the stress and other demands of the asset it houses or
3) The structure cannot be used economically for other purposes.
7-2 2014 Tax Year | Depreciation Quickfinder ® Handbook
Thus, structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns and coal tipples are not treated as buildings [Reg. §1.48-1(e)]. These structures are often assigned a recovery period based on the activity in which they are used. See
Revenue Procedure 87-56 (reproduced in Tab 12).
N Observation: The depreciation rules for real property are generally less favorable than for personal property. Therefore, when a building is purchased, built or renovated, it is important to identify any personal property qualifying for more favorable depreciation included in the cost. See Finding Personal Property Included in a
Building’s Cost (Cost Segregation) on Page 7-11.
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Residential rental property (assigned a 27.5 year recovery period) is a building or structure where at least 80% of the gross rents are from a dwelling unit, which includes houses, apartments and mobile homes, but not units in a hotel, motel or other establishment where more than 50% of the units are used on a transient basis.
IRS Ruling: A mixed-use development, consisting of residential rental apartments and hotel rooms, was treated as a single building for the 80% test for determining whether the property is residential real property. The projects were on a single tract of land, operated as an integrated unit (as evidenced by the actual operation, management, financing and accounting for the buildings) and were contained in one building. (Ltr. Rul. 201243003) o
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Open-air parking structures have been classified by some taxpayers as land improvements and depreciated over 15 years. However, the IRS clarified in a Coordinated Issue Paper (CIP) that they fall under the definition of buildings in Regulation Section 1.48-1(e) and, as such, are nonresidential real property with a recovery period of 39 years. (LMSB4-0709-029)
Description of property . Open-air parking structures are typically multi-level parking structures accessed by a ramp system. They have at least two sides that are a minimum 50% open to the outside because they were designed to eliminate the need for heating and ventilation systems. Drivers and passengers are protected to some degree from rain, ice and wind.
These parking structures typically have the following features:
• Hydraulic elevators.
• Internal stairwells.
• Interior lighting.
• Fire sprinklers.
• Signage to facilitate safe and speedy evacuations during an emergency.
• A separate area or room for electric metering and switching.
U Caution: The CIP concludes that, given the lack of support for a position of depreciating open-air parking structures over 15 years, taxpayers may be assessed an accuracy-related penalty under
Section 6662. While the CIP is unofficial IRS guidance, it does indicate that the IRS is likely to assess such a penalty. Thus, tax professionals may want to consider filing a change in accounting method for taxpayers who are depreciating these structures over
15 years. See Tab 10 for coverage of accounting method changes.
 Note: All CIPs were de-coordinated by the IRS in January
2014. Tax professionals should be alert for future guidance replacing these CIPs. To the extent that the CIP included guidance or tools relevant to addressing an issue or transaction, such guidance
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Generally, the cost of building a road includes the cost of preparing the land and the cost of the road surface. The initial cost of surfacing a road is generally depreciable. See Road Building Costs below for analysis of specific costs.
Impact fees.
Impact fees (one-time charges to finance specific offsite capital improvements for general public use) paid by developers should be capitalized and added to the cost of newly constructed buildings, rather than considered a cost of the nondepreciable land. (Rev. Rul. 2002-9)
Density variances.
The cost of so-called density variances allowing development of larger buildings than would have otherwise been permitted is added to the basis of the depreciable buildings
( Maguire/Thomas Partners Fifth & Grand, Ltd.
, TC Memo 2005-
34). The variances have a determinable useful life that is equal to the depreciable lives of the buildings because they would expire if the buildings were ever replaced. In other words, a new variance would have to be obtained if the original buildings were replaced.
Land and environmental surveys.
These studies generally cover the entire property being developed, not just where the buildings and improvements will be placed. Surveys that help define the property (for example, boundary or mortgage surveys) are related to the land itself and are not depreciable.
Other surveys such as percolation tests and contamination studies are used to determine if a structure can properly be built on the site.
• If the survey will not necessarily need to be redone when the depreciable improvement is replaced, the cost of the survey is associated with the land and, therefore, is not depreciable.
• A survey that must be redone when the depreciable improvement is replaced is added to the basis of the improvement.
Exception: The existence of an ordinance requiring that the survey be redone does not mean that the improvement’s replacement requires the survey to be replaced. (Ltr. Rul. 200043016) e
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 Expired Provision Alert: Taxpayers that own or lease commercial buildings may deduct, rather than capitalize and depreciate, all or part of the cost of qualifying energy efficient commercial building property (IRC §179D). The deduction is allowed for both new and existing buildings but only for qualifying property placed in service after 2005 and before 2014. Although the deduction for the cost of energy efficient commercial building property has expired for property placed in service after 2013, this discussion is included in the event the deduction is extended to 2014.
2015
Energy efficient commercial building property is depreciable property that is:
• Installed on or in a building located in the U.S. that is not a (1) single-family house, (2) multi-family structure of three stories or fewer above grade, (3) mobile home or (4) manufactured house.
• Part of the (1) interior lighting system, (2) heating, cooling, ven tilation and hot water systems or (3) building envelope. Building envelope includes insulation materials primarily designed to reduce heat loss or gain, exterior windows, skylights, exterior doors and some metal roofs. [IRC §25C(c)(2)]
• Certified that it will reduce or is part of a plan to reduce the overall energy costs of these systems by 50% or more.
Before claiming the deduction, the property must be certified as meeting the requirements by an unrelated, qualified and licensed engineer or contractor. Taxpayers must retain the certification in their tax records.
The maximum allowable deduction for any building is $1.80 per building square footage. This is an aggregate limit over all tax years so once it is reached, no further deductions for that building are allowed.
Type of Cost
Excavating, grading and removing soil to prepare a roadbed—road is intended to be permanent.
Excavating, grading and removing soil to prepare a roadbed—road is temporary.
Excavating, grading and removing soil to prepare a roadbed—road closely associated with a depreciable asset.
Initial costs of surfacing the road (for example, applying gravel or paving).
Costs of resurfacing the road.
Building bridges and culverts.
Treatment
Generally added to the basis of nondepreciable land.
Authority
FSA 200021013
If the road is temporary (will be used only for a determinable length of time), costs can be depreciated. Whether a road is temporary depends on the original intent, not on the road’s physical condition. In the ruling, road built by loggers to harvest a specific tract of trees was temporary. Once the harvest was complete, road would be abandoned.
If a road is so closely tied to a depreciable asset that the road will be retired, abandoned or replaced contemporaneously with that asset, costs are depreciable. In the ruling, the roads were between buildings in an industrial complex.
Rev. Rul. 88-99
Rev. Rul. 68-193, clarifying
Rev. Rul. 65-265
Depreciable, regardless of whether the road is temporary or permanent, since the surface is subject to wear and tear (has an expected useful life).
Generally, expensed as repairs—see Tab 1.
Depreciable, regardless of whether the road is temporary or permanent.
Rev. Rul. 88-99
Toledo Home Federal Savings and Loan Ass’n.
, 9 AFTR 2d
1109 (DC OH 1962); W.K.
Coors , 60 TC 368 (1973)
Rev. Rul. 88-99
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2013 2014
Example: Jack operates his sole proprietorship in a small office building he owns. Jack places in service $3,000 of qualified energy saving property in
2012 and $6,000 in 2013 . The building has 3,000 square feet.
Jack’s total deduction for the expenditures is limited to $5,400 (3,000 square feet × $1.80). Therefore, he deducts the full $3,000 spent in 2012 and $2,400
($5,400 – $3,000) spent in 2013 . The remaining 2013 costs of $3,600 ($6,000 –
$2,400) must be capitalized and depreciated.
2014 2013
Partially qualifying property.
Property that would otherwise qualify, except that it does not meet the 50% energy reduction test, is still eligible for a reduced deduction, limited to 60¢ times the building square footage. [IRC §179D(d)]
N Observation: The partial deduction is allowed for any energy-saving property installed in an eligible building system (interior lighting; heating, cooling, ventilation and hot water; or building envelope) if it meets the energy-saving target prescribed for that particular system, even if the overall 50% cost reduction is not achieved with regard to the building. See Notices 2006-52, 2008-
40 and 2012-26 for the system-specific requirements for partially qualifying property.
Reporting.
C corporations, S corporations and partnerships claim the deduction on the “Other deductions” line of their respective returns. Presumably, individuals report the deduction on the “Other expenses” line of Schedule C, E or F.
Basis reduction.
If a deduction is allowed, the basis of the property is reduced by the amount of the deduction.
Recapture.
The energy efficient commercial building deduction is subject to Section 1245 ordinary income recapture when the building or property is sold [IRC §1245(a)(2)(C)]. Thus, when the building is sold, gain to the extent of the deduction is taxed as ordinary income.
Public buildings.
When qualified property is installed on or in property owned by a federal, state or local government, the related energy efficient commercial building deduction is allocated to the person primarily responsible for designing the property instead of the actual building owner (the tax-exempt governmental unit).
Public buildings include those owned by public schools. See Notice
2008-40 for how this rule works.
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 Expired Provision Alert: The credit for builders of energy efficient new homes has expired for homes acquired after 2013.
The following discussion is included in the event the credit is extended to 2014.
Contractors (including producers of manufactured homes) that build new energy efficient homes in the U.S. are eligible for a credit of $2,000 per dwelling unit (IRC
§45L). The credit is reported on Form 8908, Energy
Efficient Home Credit . Partnerships and S corporations transfer the amount to Schedule K. All others carry it to
Form 3800, General Business Credit .
• To qualify, the dwelling unit must be certified to have annual energy consumption for heating and cooling that is at least 50% less than comparable units and meet certain other requirements.
• The credit can also apply to a substantial reconstruction and rehabilitation of an existing dwelling unit.
• A manufactured home that meets a 30% reduced energy con sumption standard can generate a $1,000 credit.
7-8 2014 Tax Year | Depreciation Quickfinder ® Handbook
• These credits only apply to homes sold by contractors for use as personal residences.
• The contractor’s tax basis in the home is reduced by the amount of the credit.
• Construction must be substantially completed after August 8,
2005, and the home must be purchased after 2005 and before
2014 .
2015
Certification.
The IRS issued guidance on the certification process that builders must complete to qualify for the credit. The notices also provide a public list of software programs that may be used in calculating energy consumption for obtaining a certification. See
Notice 2008-35 for standard homes rules. Notice 2008-36 covers manufactured homes. n
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 Expired Provision Alert: The nonbusiness energy property credit has expired for property placed in service after 2013. The following discussion is included in the event the credit is extended to 2014.
Taxpayers are allowed a nonrefundable credit equal to the sum of (1) 10% of the cost of qualified energy efficiency improvements and (2) the amount of residential energy property expenditures (up to certain limits). The credit is limited to $500 per taxpayer. This is a lifetime limit. The property must be new property, and it must be installed in or on the taxpayer’s principal residence (including a manufactured home) in the U.S. The credit applies to property placed in service in 2006, 2007 and 2009– 2013 .
2014
These improvements are building envelope components, such as: [IRC §25C(c)(2)]
1) Insulation materials or systems designed to reduce the heat loss or gain of a dwelling unit;
2) Exterior doors and windows (including skylights); and
3) Metal or asphalt roofs installed on a dwelling unit (including manufactured homes), but only if they are designed to reduce the heat gain of such dwelling unit.
Expenditures must be for the following types of property (including labor costs for onsite preparation, assembly or original installation of the property): [IRC §25C(d)(2); Ltr. Rul. 201130003]
1) Energy efficient building property (such as certain electric heat pumps, water heaters, biomass fuel stoves and central air conditioners);
2) A qualified natural gas, propane or oil furnace or hot water boiler; or
3) An advanced main air circulating fan.
Taxpayers must receive a proper certification from the manufacturer for property on which they plan to take the credit. Notices
2009-53 and 2013-70 provide that taxpayers may rely on the manufacturer’s certification to claim the credit, except as specified therein.
Costs eligible for the nonbusiness energy property credit (IRC
§25C) and the Residential Energy Efficient Property Credit discussed on Page 7-9 (IRC §25D) can be allocated according to
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the manufacturer’s certification that a portion of the property is qualified energy property. Additionally, the IRS has agreed that labor costs related to the installation of the property can be similarly apportioned. (Ltr. Rul. 201130003)
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Individuals can claim a tax credit for residential energy efficient property placed in service in 2006–2016. (IRC §25D; Notice
2013-70)
Property Type
Solar Electric
Credit Amount
Solar Water Heating 30% of cost (in tax years beginning before 2009, the credit was capped at $2,000)
30% of cost (in tax years beginning before 2009, the credit was capped at $2,000)
Fuel Cells 30% of cost; max credit = $1,000 per kW of capacity
Small Wind Energy 30% of cost (in tax years beginning before 2009, the credit was capped at $4,000)
Geothermal Heat
Pump
30% of cost (in tax years beginning before 2009, the credit was capped at $2,000)
• The credit (other than for fuel cells) is available for equipment for the taxpayer’s personal residence, which must be in the U.S.
The credit for fuel cell property is only available for a principal residence.
• No credit is allowed for equipment used to heat swimming pools or hot tubs.
• The cost includes labor costs properly allocable to the onsite preparation, assembly or original installation of the property and for piping or wiring to interconnect such property to the home.
• The taxpayer’s basis in the credit property is reduced by the amount of the credit.
• The credit can offset both regular tax and AMT. Any unused credit can be carried forward to the next year. [IRC §25D(c)(2)]
• Taxpayers can rely on manufacturer’s statements and certifica tions that property qualifies for the credit. (Notices 2009-41 and
2013-70)
• Credit is available for new construction as well as improvements to existing homes.
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A landlord (lessor) generally can depreciate property leased to a tenant (lessee) as well as any improvements that the landlord makes to the property during the lease term [Reg. §1.167(a)-4]. Exception: No depreciation can be claimed if the lease is treated as a capital lease for tax. In that case, the tenant is treated as the owner for tax purposes and claims the depreciation deductions. If the tenant is only obligated to repair and maintain the property, the lease is generally not a capital lease and the landlord can still claim depreciation on the property. See Lease vs. Purchase on Page 1-3 for details.
Capitalized improvements made during the lease generally must be depreciated over the improvement’s recovery period, not over the remaining term of the lease [IRC §168(i)(8)]. It doesn’t matter whether the landlord (lessor) or tenant (lessee) makes the improvements.
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Leasehold improvements that are structural components of the building generally have a 27.5-year or 39-year recovery period. See
Qualified Leasehold
Improvements
below and Qualified Restaurant Property and Qualified Retail Improvement Property on Page 7-10 for exceptions. Also, some improvements (such as carpeting or moveable partitions) have a shorter recovery period because they are considered tangible personal property rather than structural components of the building. See Can the
Asset Be Moved?
on Page 7-13.
Tenant improvements.
Generally, improvements made by a tenant/lessee are capitalized and depreciated by the tenant over the improvement’s MACRS recovery period [IRC §168(i)(8)]. However, if the lease agreement provides that the cost of improvements made by a tenant is credited against rent payments due, the tenant deducts the cost of improvements made to the owner’s property as rent expense. [ Brown , 47 AFTR 244 (7th Cir. 1955)]
If improvements made by the tenant are left behind at the end of the lease, the tenant takes an abandonment loss. The amount equals the adjusted basis of the improvements. The abandoned improvements generally become the landlord’s property. However, the landlord generally is not required to include the value of the improvements in income. (IRC §109)
Example #1: Walter leases a commercial building from Taylor Properties, Inc.
(TPI). The lease is for five years and is non-renewable. On January 1 of the fourth year of the lease, Walter adds permanent exterior doors and replaces the building’s windows, spending $10,000. His rent payments are not credited for the cost of the improvements. He must depreciate the $10,000 of improvements over the building’s recovery period (39 years), even though the lease will end (and the improvements will become TPI’s property) after two more years.
When the lease terminates, Walter will have taken two years of depreciation on the leasehold improvements, so his adjusted basis in them will be $9,498
($10,000 – $246 – $256). That amount can be claimed as an abandonment loss in the year the lease terminates, assuming Walter does not salvage or retain any of the improvements.
When the landlord makes improvements to leased property, the remaining basis in the improvements is written off at the end of the lease term only if the improvements are disposed of or abandoned at that time [IRC §168(i)(8)]. If the improvements are not abandoned or disposed of, the landlord continues to depreciate them.
Example #2: Walter owns a commercial building that he leased to a veterinarian for five years. Under the lease agreement, Walter had to make certain improvements to the building to make it suitable for the vet’s practice (for example, adding covered area with fenced pens, “doggie doors,” etc.). At the end of the veterinarian’s lease, Walter leases the building to an engineering firm. The additions made for the veterinarian are unsuitable for the engineering firm, so Walter removes them. He can take an abandonment loss (equal to his adjusted basis in the improvements that he removed) that year.
 Expired Provision Alert: Before 2014, special rules for Section 179 expensing, 15-year recovery period and special (bonus) depreciation applied to qualified leasehold improvements. However, these provisions are not available for 2014 unless Congress enacts legislation that extends them. This section is included in the event the rules are extended to 2014. If the rules are not extended, property that formerly was classified as qualified leasehold improvements and placed in service in 2014 is depreciated under the general MACRS rules—see the Depreciable Real Property
(2014) table on Page 7-1 and
Depreciating Leasehold Improvements in the previous column.
2014 Tax Year | Depreciation Quickfinder ® Handbook 7-9

2013
Item
Depreciation Method
Recovery Period
SL
15 yr 1
Eligible for Special Depreciation?
Yes 2
Eligible for Section 179 expensing? Yes 3
2014
IRC §
168(b)(3)
168(e)(3)(E)
168(k)(2)
179(f)
1 15-year recovery period also applied if placed in service 10/23/04– 12/31/12 .
2 Special depreciation also available if placed in service 9/11/01–12/31/04 or
2008– 2012 .
2013 12/31/13
3 Also eligible if placed in service in a year beginning in 2010– 2012 . Exception:
Heating and air conditioning units are not eligible. See Qualified Real Property on Page 5-8 for rules, including a $250,000 annual limit.
Qualified leasehold improvements must meet all of the following tests: [IRC §168(k)(3)]
1) The improvement is to an interior portion of a building.
2) The building is nonresidential real property.
3) The improvement is made by the lessee (tenant), sublessee or the lessor (landlord) pursuant a lease agreement (or a commitment to sign a lease).
4) The improvement is made to space to be occupied exclusively by the lessee or sublessee.
5) The improvement is placed in service more than three years after the date the building was first placed in service (by any person).
Qualified leasehold improvements do not include any expenditure for enlarging the building, any elevator or escalator, any structural component benefiting a common area or the internal structural framework of the building [IRC §168(k)(3)(B)]. Heating, ventilation and air conditioning units installed on the exterior of a building or on its roof are not qualified leasehold improvement property since they are not installed to the interior of the building. (CCA
201310028)
Qualified leasehold improvements made by the landlord generally are not qualified leasehold improvements in the hands of any subsequent owner of the improvement unless the property is transferred at the landlord’s death or in certain nonrecognition transactions, such as a like-kind exchange. [IRC §168(e)(6)]
U Caution: Improvements made under a lease between related persons cannot be qualified leasehold improvements. Related persons include members of an affiliated group as well as spouses (including legally married same-sex spouses), siblings, children, grandchildren, parents and grandparents and certain controlled entities (for example, shareholder and corporation, if the shareholder directly or indirectly owns more than 80% of the stock).
See Regulation Section 1.168(k)-1(c) for details on qualified leasehold improvements. Although that regulation discusses the
50% and 30% special (bonus) depreciation rules that were in effect for property placed in service after September 10, 2001 and
(generally) before 2005, the IRS has announced that taxpayers can rely on the regulation for computing special (bonus) depreciation for assets placed in service in 2008. (News Release IR-2008-58)
 Note: Although the IRS has not specifically stated taxpayers can rely on the regulation for assets placed in service after 2008, presumably the IRS will treat those assets the same as those placed in service in 2008.
7-10 2014 Tax Year | Depreciation Quickfinder ® Handbook
 Expired Provision Alert: Before 2014, special rules for Section 179 expensing and 15-year recovery period applied to qualified restaurant property. However, these provisions are not available for
2014 unless Congress enacts legislation that extends them. This section is included in the event the rules are extended to 2014. If the rules are not extended, property that formerly was classified as qualified restaurant property and placed in service in 2014 is depreciated under the general MACRS rules—see the Depreciable
Real Property (2014) table on Page 7-1.
Depreciation Method
Recovery Period
2013
Item
SL
15 yr 1
Eligible for Special Depreciation?
No 2
Eligible for Section 179 expensing? Yes 3
2014
IRC §
168(b)(3)
168(e)(3)(E)
168(e)(7)
179(f)
1 15-year recovery period also applied if placed in service 10/23/04– 12/31/13 .
2 Unless property also meets the definition of qualified leasehold improvements (Rev.
Proc. 2011-26). Qualified restaurant property placed in service 10/23/04–12/31/04 or in 2008 also qualified for special depreciation.
2013
3 Also eligible if placed in service in a year beginning in 2010– 2012 . Exception:
Heating and air conditioning units are not eligible. See Qualified Real Property on Page 5-8 for rules, including a $250,000 annual limit.
The definition of qualified restaurant property has been modified several times. [IRC §168(e)(7)]
Placed in Service Definition
10/23/04–12/31/07 Any Section 1250 property that is an improvement to a building if more than 50% of the building’s square footage is devoted to preparation of, and seating for on-premises consumption of, prepared meals. The improvement must
12/31/14 be placed in service more than three years after the date the building was first placed in service.
1/1/08–12/31/08 Same as preceding row, but the three-year rule doesn’t apply.
1/1/09– 12/31/13 Same as preceding row, but buildings also qualify (if the
50% of square footage rule is met).
Observation: Improvements to leased property can qualify even if the lease is between related parties.
æ Practice Tip: Some features of a restaurant (such as drivethrough equipment, decorative lights and specialized electrical and plumbing hook-ups) are considered Section 1245 property that is assigned a five-year recovery period (Asset Class 57.0 per
Rev. Proc. 87-56). See What is Cost Segregation? on Page 7-11.
 Expired Provision Alert: Before 2014, special rules for Section 179 expensing and 15-year recovery period applied to qualified retail improvement property. However, these provisions are not available for 2014 unless Congress enacts legislation that extends them. This section is included in the event the rules are extended to
2014. If the rules are not extended, property that formerly was classified as qualified retail improvement property and placed in service in 2014 is depreciated under the general MACRS rules—see the
Depreciable Real Property (2014) table on Page 7-1 and Depreciating Leasehold
Improvements on Page 7-9.
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Depreciation Method
2013
Item
SL
2014
IRC §
168(b)(3)
168(e)(3)(E) Recovery Period 15 yr 1
Eligible for Special Depreciation?
No 2
168(e)(8)
Eligible for Section 179 expensing? Yes 3 179(f)
1 15-year recovery period also applied if placed in service in 2009– 2012 .
2013
2 Unless property also meets the definition of qualified leasehold improvements.
(Rev. Proc. 2011-26) 2013
3 Also eligible if placed in service in a year beginning in 2010– 2012 . Exception:
Heating and air conditioning units are not eligible. See Qualified Real Property on Page 5-8 for rules, including a $250,000 annual limit.
Qualified retail improvement property is any improvement to an interior portion of a building that is nonresidential real property if:
[IRC §168(e)(8)]
1) Such portion is open to the general public and is used in the retail business of selling tangible personal property to the general public and
2) Such improvement is placed in service more than three years after the date the building was first placed in service.
N Observation: Improvements to leased property can qualify even if the lease is between related parties.
However, expenditures attributable to the following are not qualified retail improvement property:
1) Enlarging the building.
2) Elevators or escalators.
3) Structural components benefitting a common area.
4) The internal structural framework of the building.
æ Practice Tip: Some features of a retail store (such as electronic article surveillance systems, sound systems, decorative millwork and electrical and plumbing hook-ups for specialized equipment) are considered Section 1245 property that is assigned a five-year recovery period (Asset Class 57.0 per Rev. Proc. 87-56). See What
is Cost Segregation?
below.
Qualified retail improvement property retains its character as such only for its original owner. However, exceptions for transfers due to the owner’s death, corporate mergers, formation of business entities where the taxpayer retains significant control, like-kind exchanges and involuntary conversions apply. [IRC §168(e)(8)] f
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When a building used for business or investment is bought, constructed or renovated, it is important to allocate the costs incurred to the appropriate asset. Often, some of the cost will be attributable to assets (either personal property or land improvements) that can be depreciated using much more favorable rules than the straight-line method and 27.5-year or 39-year recovery period assigned to most buildings.
Replacement Page 1/2015
Example: Walter purchases a commercial store building on January 20 for
$200,000. Based on a 39-year life, his first year depreciation deduction is
$4,914 ($200,000 ÷ 39 x 11.5/ 12 ).
Variation: Assume that shortly after the building is purchased, Walter determines that $90,000 of his cost is properly allocated to point of sale systems that should be depreciated over five years. Then, his depreciation deduction for the first year would be:
39-year property $ 110,000 ÷ 39 × 11.5/ 12 .........
Five-year property $ 90,000 × 20% .....................
Total ........................................................................
$ 2,703
18,000
$ 20,703
Properly allocating costs to the five-year property allows Walter to recover
$90,000 of his investment over a five-year recovery period, rather than over 39 years. Even better, Walter could elect to expense $25,000 (2014 Section 179 deduction limit as of this writing) o f the $90,000 of equipment (if he had not already claimed the deduction for other assets). See Tab 5 for more on Section 179.
A cost segregation study is an analysis of the assets constructed, acquired or renovated to properly allocate costs to the appropriate assets. Obviously, the intent is to allocate as much cost as possible to shorter-lived Section 1245 (generally tangible, personal) property.
under Section 179
æ Practice Tip: Taxpayers should be aware that any sales price allocation agreed to in a contract between the buyer and seller may prevent them from later changing their allocation based on a cost segregation study.
Court Case: A corporation acquired a group of business assets. The sales contract allocated the sales price to various assets. A subsequent cost segregation study divided the asset classified as a “building” into subcomponents, some of which were assigned a shorter MACRS recovery period than the
39-year period generally assigned to nonresidential real property. However, the taxpayer was bound by the allocation in the sales contract so the amount shown as “building” in the sales contract had to be depreciated over 39 years.
[ Peco Foods, Inc.
, 112 AFTR 2d 2013-5137 (11th Cir. 2013)]
N Observation: For large projects (generally, costs over
$500,000), a firm specializing in cost segregation studies is often engaged to do the study. These firms usually employ engineers and other specialists who are capable of identifying and classifying different types of assets. Taxpayers undertake cost segregation projects typically when the tax savings associated with the additional depreciation claimed or the acceleration of depreciation deductions is expected to exceed the cost of the analysis. If, however, the taxpayer sells a significant portion of the assets for a gain soon after finishing the cost segregation project, the additional depreciation taken as a result of the study is recaptured.
Therefore, the cost of the study may not be offset by tax savings.
For smaller projects, the tax professional may be able to get enough information from the client to break out some assets that are personal property or land improvements. However, when this approach is used, the IRS may challenge it unless the taxpayer can show that the remaining costs (those allocated to the building) are reasonable. See IRS View of Cost Segregation Studies on Page 7-13 for details.
A three-step allocation process enables taxpayers to assign as much cost as possible to depreciable property, or property with recovery periods that are much shorter than the MACRS
39-year and 27.5-year lives normally assigned to buildings. The three steps are as follows:
1) Making an initial land-to-building cost allocation.
2) Identifying land improvement costs.
3) Analyzing building costs to identify assets that are not part of the building or a structural component.
2014 Tax Year | Depreciation Quickfinder ® Handbook 7-11

 Expired Provision Alert: The exclusion for COD income on qualified principal residence debt expired on December 31, 2013.
Unless Congress extends the provision, it will not be available for debt forgiven after 2013. This discussion is retained in the event the provision is extended to 2014.
2015
The exclusion of COD income from taxable gross income is available for qualified principal residence indebtedness discharged after 2006 and before 2014 [IRC §108(a)(1)(E)]. The exclusion is limited to $2 million ($1 million for married filing separately) [IRC
§108(h)(2)]. Qualified principal residence indebtedness is debt that is incurred in the acquisition, construction or substantial improvement of a taxpayer’s principal residence and that is secured by that residence. The principal residence is the taxpayer’s main home where the taxpayer lives most of the time; the taxpayer can only have one main home at any one time. It does not include home equity loans used for other purposes or vacation home mortgages.
See IRS Publication 4681 for details.
The amount excluded from gross income is applied to reduce (but not below zero) the basis of the taxpayer’s principal residence.
The exclusion from income for qualified principal residence indebtedness is reported on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082
Basis Adjustment) .
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Taxpayers who finance the sale of personal property and later repossess that property generally will have a gain or loss on the repossession. They may also have a bad debt expense if the gain was not reported on the installment method.
Original Sale Reported
Installment method not used
Basis in debt obligation 1
Debt’s full face value (or its FMV at the time of the original sale if
FMV used to compute gain or loss in the year of sale) less all principal payments received.
Gain or loss FMV of the repossessed property less:
• Basis in the debt obligation and
• Any repossession costs.
If a gain, it is all ordinary income.
If a loss, see Bad debt below.
Installment method used
Unpaid balance of debt multiplied by one minus the gross profit percentage on the sale.
FMV of the repossessed property less:
• Basis in the debt obligation and
• Any repossession costs.
Character (capital or ordinary) of the gain or loss on repossession is same as on the original sale.
N/A Bad debt
Basis in repossessed property
If FMV of the repossessed property is less than the sum of debt basis plus repossession costs, taxpayer deducts a bad debt 2
FMV at date of repossession.
FMV at date of repossession.
1 If only part of the debt is discharged by the repossession, consider only the basis
2 of the part discharged.
Either business or nonbusiness, depending on the property originally sold.
The repossession rules apply whether or not title to the property was ever transferred to the buyer. Also, there is no difference if the seller repossesses the property or the buyer voluntarily surrenders it. However, it is not a repossession if the buyer puts the property up for sale and the seller repurchases it.
For the repossession rules to apply, the repossession must at least partially discharge (satisfy) the buyer’s installment obligation to the seller. The discharged obligation must be secured by the repossessed property.
The seller/lender’s gain or loss on the repossession of personal property is determined by subtracting the basis of the installment obligation (plus any repossession expenses) from the property’s FMV plus the FMV of any other assets received in the transaction.
1) FMV of the repossessed property ........................................ 1) $
2) Unpaid balance of the debt obligation .................................. 2)
3) Gross profit percentage for the installment sale. .................. 3)
4) Unrealized profit. Multiply line 2 by line 3 ............................. 4) $
5) Basis in the debt. Subtract line 4 from line 2 ........................ 5) $
6) Costs of repossessing the property ...................................... 6)
7) Add lines 5 and 6 .................................................................. 7) $
8) Gain or loss on repossession. Subtract line 7 from line 1 .... 8) $
%
Example: Courtney sold her violin for $1,500 [$300 down and $100 a month for 12 months (plus interest)]. Her gross profit percentage is 40%. She reported the sale on the installment method. After the fourth monthly payment, the buyer defaulted on the note (which had an unpaid balance of $800), and Courtney repossessed the violin. Its FMV on the date of repossession was $1,400. The legal costs of repossession were $75. Courtney’s gain on the repossession is as follows:
FMV of repossessed property ......................................................... $ 1,400
Unpaid note balance ........................................................................
800
Gross profit percentage ................................................................... × 40%
Unrealized profit .............................................................................. $ 320
Basis in installment note ($800 – $320) .......................................... $ 480
Repossession costs ......................................................................... 75
Total basis and costs ($480 + $75) .................................................. $ 555
Gain ($1,400 – $555) ....................................................................... $ 845 f
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If a seller finances the sale of real estate and later forecloses on the real property, special rules apply if all of the following conditions are met: (IRC §1038)
1) The seller repossesses the property to protect his or her security rights in the property.
2) The installment obligation satisfied by the repossession was received in the original sale.
3) The seller does not pay any additional consideration (including assuming a debt that arose after the sale) to the buyer to reacquire the property.
Condition 3 above does not have to be met for the special rules to apply if:
1) The reacquisition and payment of the additional consideration were provided for in the original contract of sale or
2) The buyer has defaulted, or default is imminent.
U Caution: Special rules may apply if the repossessed property was the taxpayer’s main home before the sale. See Regulation
Section 1.1038-2 for further information.
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Because the apartment building’s SL method is slower than the method that applied to the farm building, the SL method is used for the exchanged basis in the apartment building. Also, the apartment building’s longer recovery period applies. Under the half-year convention, the farm building is treated as disposed of on June 30, 2014 (even though the exchange occurred in January).
Therefore, six months of depreciation is taken on the farm building in 2014.
The exchanged basis in the replacement (apartment) building is considered placed in service on July 1, 2014. It is depreciated SL over its remaining 22.5year recovery period (27.5-year recovery period less five years allowed for the farm building). The mid-month convention applies to the apartment building, so 2014 depreciation expense is computed as follows:
Exchanged basis ........................................................................... $ 339,107
Divided by remaining recovery period ........................................... ÷ 22.5
Annual depreciation ....................................................................... $ 15,071
Pro-rated using mid-month convention ......................................... × 5.5/ 12
2014 depreciation on apartment building ...................................... $ 6,908
Generally, a replacement property’s excess basis (if any) is treated as newly acquired property and depreciated using the MACRS recovery period, depreciation method and convention allowed for that asset [Reg. §1.168(i)-6(d)]. It is treated as placed in service in the later of the: [Reg. §1.168(i)-6(b)(4)]
• Tax year in which replacement property is placed in service or
• Tax year in which relinquished property is disposed of.
Example: GreatCo placed a retail building in service in 1999. On January 16,
2014, GreatCo exchanges the retail building plus $2 million cash for an office building in a like-kind exchange. After considering year-of-exchange depreciation, the relinquished retail building has an adjusted basis of $1.5 million. This becomes the exchanged basis amount for the replacement office building. After the exchange, the total depreciable basis of the replacement office building is
$3.5 million, which consists of $1.5 million of exchanged basis plus $2 million of excess basis (that is, cash paid).
The replacement office building’s $1.5 million exchanged basis amount is depreciated according to the rules explained earlier for exchanged basis.
The replacement office building’s $2 million excess basis amount is treated as newly acquired property placed in service on January 16, 2014. GreatCo depreciates this $2 million amount over 39 years, using the straight-line method and mid-month convention.
Both the exchanged basis of the original qualified property and the excess basis (if any) of the acquired qualified property qualify for special (bonus) depreciation if the replacement property qualifies.
[Reg. §1.168(k)-1(f)(5)]
U Caution: Special (bonus) depreciation has expired for property placed in service after 2013 (except for certain long production period property and aircraft—see Tab 2). The above discussion is included in the event it is extended to 2014.
Only the excess basis amount (generally, the amount of boot given) qualifies for a Section 179 deduction (assuming it meets all the other requirements—see Tab 5). Section 179 expense cannot be taken on the exchanged basis in the replacement property. [Reg.
§1.168(i)-6(g)]
A taxpayer who disposes of relinquished property before acquiring replacement property cannot depreciate the relinquished property’s exchanged basis between the time the relinquished property is disposed of and the time the replacement property is acquired.
Replacement Page 1/2015
During this time, the recovery period for the replacement property’s exchanged basis amount is suspended.
Taxpayers can elect to treat the entire basis (that is, exchanged basis plus excess basis) of replacement property as a new MACRS property asset placed in service on the date of exchange.
Reg §1.168(i)-6(i)(1)
Issue Discussion
Relinquished property Year-of-disposition depreciation on the relinquished property basis must be calculated and deducted.
Replacement property The entire basis of the replacement property (both the exchanged basis and the excess basis, if any) is depreciated as the cost of newly acquired MACRS property that is placed in service at the time of replacement.
Special (bonus) depreciation
If the asset is eligible, the entire basis in the replacement property qualifies for special (bonus) depreciation.
Section 179 expense Section 179 expense is available only for any excess basis in the replacement property.
Deferred exchanges The depreciation deduction timing rules apply. (See
Depreciation During Exchange Period in the previous column.)
Example: RobinCo placed Building R (a retail building) in service in January 2006. In January 2014, RobinCo exchanges Building R for Tower S (a radio transmitting tower) in a like-kind exchange. Since replacement Tower
S has a shorter recovery period (15 years) than relin- quished Building R (39 years), Tower S’s exchanged basis amount must be depreciated over Building
R’s longer remaining recovery period (31 years) under the general rules.
Also, since replacement Tower S’s depreciation method (150% declining balance) is faster than the method for relinquished Building R (straight-line),
Tower S’s exchanged basis must be depreciated using straight-line (the slower method).
However, RobinCo could elect out of the general rule and treat Tower S as newly acquired property placed in service in January 2014. RobinCo could then depreciate Tower S’s exchanged basis over 15 years using the 150% declining balance method. Electing out of the general rules would be beneficial in this case.
Making the election.
The election is made on a per property basis in accordance with the Form 4562 instructions [Reg. §1.168(i)-6(j)].
The election must be made by the due date (including extensions) of the return for the year of replacement.
æ Practice Tip: According to the Form 4562 instructions, a statement indicating “Election made under Section 1.168(i)-6(i)” for each property involved in the exchange must be attached to the return. The election must be made separately by each person acquiring replacement property (for example, by the partnership,
S corporation or the common parent of a consolidated group).
Once made, the election cannot be revoked without IRS consent.
Depreciation recapture taint.
If the taxpayer elects out of the general rule, the exchanged basis and excess basis are often shown as one new asset on the depreciation schedule. The cost and accumulated depreciation of the relinquished property are often not reflected. However, upon eventual disposition of the replacement property, Section 1245 or 1250 depreciation recapture is measured based on the property’s recomputed basis, including
2014 Tax Year | Depreciation Quickfinder ® Handbook 9-7

Example: LynnCo. purchased a $100,000 printer in 2012. It is depreciated over a seven-year recovery period. In 2014, LynnCo. sells the printer for $60,000.
In 2015, LynnCo.’s 2014 return is audited and the IRS changes the recovery period on the printer from seven to five years. The actual and allowable depreciation and the effect of the IRS change to the recovery period are as follows:
As Reported
Sales proceeds ............................................. $ 60,000
Per IRS
$ 60,000
Cost ...................................... $ 100,000
Accum. deprec. ..................... < 47,530>
Adjusted basis .............................................. < 52,470>
Gain .............................................................. $ 7,530
$100,000
< 61,600>
< 38,400>
$ 21,600
The IRS proposes to increase 2014 income by $14,070 ($21,600 – $7,530) to adjust the gain reported on the printer because, regardless of the depreciation claimed, the printer’s basis is reduced by allowable depreciation to $38,400.
LynnCo. can request an accounting method change for the printer on Form
3115 filed with an amended return for 2014 (the year of sale). The result of the method change will be a negative Section 481 adjustment equal to $14,070
($61,600 – $47,530). This is reported on the amended 2014 return, which also reports a positive adjustment to the gain that year.
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 Expired Provision Alert: For qualified assets placed in service before 2014, special depreciation was available. With the exception of Long Production Period Property and Aircraft on Page 2-13, special depreciation is not available for property placed in service after 2013 unless legislation is enacted to extend it.
When an asset qualifies for special depreciation, but the taxpayer fails to claim it or claims the wrong percentage, a change to the correct percentage is an accounting method change. When a taxpayer claims special depreciation on a nonqualified asset, the change to remove it is an accounting method change.
However, changing to or from claiming special depreciation is not an accounting method change if the taxpayer is trying to make a late election out of special depreciation or to apply the 30% rate instead of the 50% rate, or to revoke such an election [Reg. §1.446-
1(e)(2)]. Requests to make or revoke an election on an untimely basis must be made under Regulation Section 301.9100-3, which requires the taxpayer to request a private letter ruling. See Special
(Bonus) Depreciation on Page 2-12.
For these rules, special depreciation includes several provisions,
as listed in the Special (Bonus) Depreciation Summary table below.
Description Code §
Applies to qualified property placed in service:
All taxpayers—50% (or 100%) 168(k)
All taxpayers—30% 168(k) 2
During 2008– 2013 1 2014
After 9/10/01 and before 5/6/03
All taxpayers—50% 168(k) 2
1400L
After 5/5/03 and before 1/1/05 3,4
NY Liberty Zone—30% After 9/10/01 and before 1/1/07 5
Gulf Opportunity Zone—50% 1400N After 8/27/05 and before 1/1/08 6,7
Kansas Disaster Area—50% 1400N
Other Disaster Areas—50% 168(n)
2015
After 5/4/07 and before 1/1/09 5
After 12/31/07 for disasters occurring before 2010 (see Qualified Disaster
Assistance Property on Page 2-13)
1 During 2008− 2014 , for certain long-production property. [IRC §168(k)(2)(B)]
2 As in effect before amendment in 2008–2010.
3 Before 1/1/06 for certain long-production property (before 1/1/07 if long-production property affected by Hurricanes Katrina, Rita or Wilma). [IRC §168(k)(2);
Announcement 2006-29]
4 Taxpayers could elect to use 30% rate instead of 50%.
5 Before 1/1/10 for nonresidential real and residential rental property.
6 Before 1/1/09 for nonresidential real and residential rental property.
7 Before 1/1/12 for nonresidential real and residential rental property in certain counties and parishes that sustained significant damage. [IRC §1400N(d)(6)]
10-4 2014 Tax Year | Depreciation Quickfinder ® Handbook
Example : Asta, Inc. (a calendar-year taxpayer) purchased a
$50,000 computer on July 31, 2013. The computer qualified for 50% special depreciation, which was claimed on Asta’s
2013 tax return filed in March 2014. During November
2015, Asta realizes that it would have been better off had it not claimed special depreciation on the computer in
2013. Changing from claiming special depreciation to not claiming it is not an accounting method change because Asta is effectively trying to make a late election out of the special depreciation.
Therefore, Asta cannot make this change on a Form 3115. Instead, Asta must request a private letter ruling to make the change.
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For 2014, taxpayers may need to file an accounting method change to comply with the tangible property regulations published on September 13, 2013 (TD 9636). (See Tangible Property Regulations beginning on Page 1-4 for discussion of the regulations.)
Automatic consent procedures are provided for amounts paid to acquire, produce or improve tangible property. Procedures are also provided for obtaining automatic consent to change to a reasonable method for self-constructed assets and to change to a permissible method for certain costs related to real property acquired through a foreclosure or similar transaction (Rev. Proc. 2014-16). Automatic consent procedures for changes in accounting for dispositions of tangible property, a late partial disposition election and a revocation of a general asset account election are also available. (Rev.
Procs. 2014-17 and 2014-54) e
C
A
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Depreciation changes that are not accounting method changes are made on an amended return for the year being changed. Thus, these changes can be made only within the statute of limitations for the year being changed.
Change
Mathematical, calculation or posting errors. [Reg §1.446-1(e)]
Changing a depreciation method that has only been used on one return.
1
Adjustment in the useful life of an asset that is not a MACRS asset, as long as it is not a change to or from a useful life that is specifically assigned by the Code [for example, the 36-month life assigned to depreciable computer software by
Code Section 167(f)(1)].
A change in an asset’s placed-inservice date.
Example
A number is transposed when the preparer enters it on the tax return.
In 2013, taxpayer claims depreciation on a piece of equipment based on a seven-year recovery period, but the actual recovery period is five years. If the 2014 return has not been filed, an amended 2013 return can be filed to correct the error.
A change in the useful life of an amortizable copyright asset that is not a
Section 197 intangible.
An asset was ordered and paid for in
2013, but was not delivered and placed in service until 2014. Any depreciation claimed in 2013 would be erroneous and can be corrected by filing an amended return.
2
1 In this situation, the taxpayer can also choose to file a Form 3115 to request an
2 accounting method change. See Method Used for Only One Year on Page 10-2.
If the taxpayer initiates the change, the placed-in-service date can be corrected by adjustments in the current and following tax years, rather than by filing amended returns. [Reg. §1.446-1(e)(2)(ii)(d)(5)(v)]
Replacement Page 1/2015

the intangibles acquired in the transaction are disposed of (including being abandoned or becoming worthless). [IRC §197(f)(1)(A)]
Any unrecognized loss is added proportionately to the adjusted basis of the remaining Section 197 intangibles and is considered for future amortization deductions and when determining the gain recognized on a subsequent disposition of any of the intangibles.
[Reg. §1.197-2(g)(1)]
The amount to add to the basis of each remaining intangible asset is:
Unrecognized
Loss
×
Adjusted Basis of
Remaining Intangible
Adjusted Basis of
All Remaining Intangibles
Basis Increase to
= Remaining Section
197 Intangible
Example: On November 1, 2012, Tim acquired substantially all the assets of a retailer/manufacturer for $750,000. After allocating the purchase price to the tangible assets based on their FMVs, the remaining amount was allocated to the following Section 197 intangibles: $100,000 to a patent, $90,000 to a trademark and $50,000 to goodwill. On July 1, 2014, Tim sold the trademark for $65,000.
Selling price ..................................................................................... $65,000
Cost basis ................................................................... $ 90,000
Accumulated amortization ($90,000 ÷ 180 × 20) ....... < 10,000>
Adjusted basis ................................................................................. < 80,000>
Loss on sale .................................................................................... <$15,000>
The $15,000 loss cannot be recognized in 2014, but instead is added to the basis of the remaining intangibles as follows:
Patent
Cost basis ........................................... $100,000
Accumulated amortization
(Cost ÷ 180 × 20) ..............................
< 11,111>
Goodwill
<
$50,000
5,556 >
Total
$150,000
< 16,667>
Adjusted basis .................................... $ 88,889
Additional basis
$44,444
(88,889 ÷ 133,333) × 15,000 .............. $ 10,000
(44,444 ÷ 133,333) × 15,000 ......................................... $ 5,000
$133,333
The additions to basis should then be amortized over the remaining months of the original intangible assets’ 180-month amortization period.
Noncompete agreements. A noncompete agreement that is a
Section 197 intangible cannot be treated as disposed of or worthless before the entire (related) business interest is disposed of [IRC
§197(f)(1)(B)]. This means that amortization must continue over 15 years even if the agreement becomes worthless or is abandoned.
Acquirer’s basis and useful life in a nontaxable transfer.
The acquirer of a Section 197 intangible in a nonrecognition transaction amortizes the portion of the asset that corresponds to the transferor’s adjusted basis over the remaining useful life of the asset in the hands of the transferor. The remaining purchase price of the asset is amortized over a new 15-year period.
A taxpayer disposing of more than one amortizable Section 197 intangible in a transaction or a series of related transactions must treat all of the intangibles as one item of Section 1245 property for depreciation recapture [IRC §1245(b)(8)]. This prevents taxpayers from allocating sales proceeds to intangibles that would generate capital gain income rather than ordinary recapture income upon sale.
Exception: This rule does not apply to any Section 197 intangible whose basis exceeds its FMV.
Example: Charlie acquired two Section 197 intangible assets on January 1,
2009 for $60,000. Asset A cost $20,000 and Asset B cost $40,000. On January
1, 2014, Charlie sells the two assets for $60,000. He has claimed $4,000 of amortization per year ($60,000 total cost ÷ 15 years), so his adjusted basis in the two intangibles is $40,000 ($60,000 cost less $20,000 amortization) and his gain is $20,000 ($60,000 sales proceeds less $40,000 adjusted basis).
For recapture, Charlie must treat the sale of the two assets as the sale of a single asset, so his entire gain is characterized as ordinary recapture income.
11-4 2014 Tax Year | Depreciation Quickfinder ® Handbook
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Computer software includes all programs designed to cause a computer to perform a desired function. It also includes any database or similar item that is in the public domain and is incidental to the operation of qualifying software.
Computer software acquired in connection with the acquisition of a trade or business is a Section 197 asset only if it is: [Reg.
§1.197-2(c)(4)]
• Unavailable to the general public,
• Substantially modified (that is, cost of modifications >25% of the price of unmodified software, but at least $2,000) or
• Subject to an exclusive license.
Software that doesn’t meet these tests and any software that is not acquired in connection with the acquisition of a trade or business (or substantial part thereof) are not Section
197 intangibles. See
Software That Is Not a Section 197 Intangible below.
Rev. Proc. 2000-50
Asset
Software acquired as part of the cost of hardware—software’s cost is not separately stated.
Cost Recovery
Depreciated with the associated computer hardware under MACRS over a five-year life. Expensed as Section 179 property, if eligible.
Software is purchased separately or its cost is separately stated from any related hardware purchase.
(Off-the-shelf software that is readily available for sale to the public.)
Depreciated straight-line over 36 months starting with the month placed in service.
Note: May be eligible for Section 179 expensing if placed in service in a tax year beginning after 2002 and before 2014 , and for special (bonus) depreciation if placed in service after 2007 and before
2014 .
Software that is leased or licensed. Expensed currently (as rental expense).
Software developed internally as a result of research or experimental expenditures.
Software with a useful life of less than one year.
Expensed or, at the taxpayer’s election, capitalized and amortized over 36 or 60 months.
Expensed currently.
IRS Ruling: A taxpayer purchased software and hired consultants to customize it (integrating different software modules such as financial accounting, inventory control, sales, etc.) before using it for its intended purposes. The
IRS ruled that (1) the software’s cost is capitalized and amortized ratably over
36 months under Code Section 167(f) because the software was acquired in a transaction involving the acquisition of a trade or business and therefore not subject to Code Section 197 and (2) the treatment of the costs of adapting and customizing software depends on the nature of the work performed and who is responsible for developing the new software. In the ruling, the taxpayer employed consultants, but in the end, was solely responsible for the creation and performance of the software project. So the taxpayer’s costs of writing readable software code were deductible as self-developed software under
Rev. Proc. 2000-50. (PLR 200236028)
S
h
f
C
p
C
Taxpayers engaged in the trade or business of film production may be able to amortize the creative property costs for properties not set for production within three years of the first capitalized transaction.
Creative property costs include costs paid or incurred to acquire and develop screenplays, scripts, story outlines, motion picture production rights to books and plays, and other similar properties
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2015

U Caution: on which shelter belts or ornamental trees (for example, Christmas trees) are planted.
For qualified timber property disposed of within 10 years after incurring qualifying reforestation expenses, report any gain as ordinary income up to the amount expensed or amortized. [IRC
§1245(a)(3) and IRC §1245(b)(7)]
R
Qualified timber property does not include property
e
e
Research and experimental (R&E) expenditures are costs incurred in a trade or business for activities intended to provide information that would eliminate uncertainty about the development or improvement of a product (Reg. §1.174-2). For this purpose, a product includes any of the following:
• Formula.
• Inv ention.
• Patent.
• Pilot model.
• Process.
• Techn ique.
• Property similar to the items listed above.
The term product also includes products used in the taxpayer’s trade or business or held for sale, lease or license.
Uncertainty exists if the information available does not establish how to develop or improve a product or the appropriate design of a product.
2015
U Caution: Although the costs of obtaining a patent, including attorneys’ fees paid or incurred in making and perfecting a patent application, are R&E costs, any costs to obtain someone else’s patent are not.
Costs not included.
R&E costs do not include expenses for any of the following activities:
• Advertising or pr omotions.
• Consumer surveys.
• Efficiency surveys.
• Management studies.
• Quality control testing.
• Research in connection with literary, historical or similar projects.
• The acquisition of another’s patent, model, production or process.
Deducting the costs. Research and experimental costs are deducted in one of the following ways:
1) Deduct as a current business expense.
2) Elect to amortize over 60 months.
3) 10-year optional write-off.
See Deducting Research and Experimental Expenditures below for a discussion of the advantages and disadvantages to each of the three methods.
Making the elections.
To elect the optional write-off method or amortization of research costs, fill out Part VI of Form 4562 and attach to either a timely filed return (including extensions) or an amended return within six months of the original due date of the return (excluding extensions). If electing the optional write-off method, a statement must also be included with the taxpayer’s name and address, taxpayer number and the type of research cost and specific amount of the research cost for the election.
 Expired Provision Alert: The research credit expired for expenses paid or incurred after December 31, 2013. Congress has retroactively renewed this credit (post-expiration) on multiple occasions. Tax professionals should monitor developments for possible renewal of the credit. This discussion is included in the event the credit is extended to 2014.
Taxpayers may elect to claim a research credit (RC) for R&E costs rather than expensing them. Not all costs that are R&E costs will qualify for the RC. See
Qualified research expenditures below.
U Caution: If a taxpayer elects to claim the RC for certain costs, those same costs cannot be expensed or capitalized and amortized. In other words, taxpayers cannot get a double tax benefit from the same costs.
Qualified research expenditures. The RC can be claimed for qualified research expenditures (QREs) conducted as part of a taxpayer’s trade or business and paid or incurred before January 1, 2014 . QREs are the sum of in-house research expenses and contract research expenses. [IRC §41(b)(1) and Reg. §1.41-4]
In-house research expenses are:
1) Wages paid to an employee engaged in qualified research or in the direct supervision of qualified research.
2) Amounts paid for supplies used to conduct qualified research.
3) Amounts paid for the use of computers to conduct qualified research.
Contract research expenses are 65% of amounts paid to persons other than employees for qualified research. The limit is increased to 75% for payments made to a qualified research consortium , which is an organization that has the following characteristics:
1) It is a Section 501(c)(3) or 501(c)(6) organization and is exempt from tax under Code Section 501(a).
2) It is organized and operated primarily to conduct scientific research.
3) It is not a private foundation.
Payments made to a qualified research consortium are made on behalf of the taxpayer and one or more unrelated taxpayers.
Method
Current Business
Expense
[IRC §174(a)]
Elect to Amortize
[IRC §174(b)]
Optional Write-
Off Method
[IRC §59(e)]
Description
Research and experimental costs that are ordinary and necessary business expenses can be deducted in the current year as Other Business Expenses . The taxpayer must adopt this method in the first year that such expenditures are paid or incurred. Occasionally, the taxpayer may adopt this method in a later year with IRS consent.
Amortization period begins with the month an economic benefit from the expenditures is first received. Costs are amortized ratably over a period of 60 months or more. This is a one-time election that applies to all expenditures in the year of election and all subsequent years and can be revoked only with IRS consent.
Research and experimental costs are deducted, if elected, ratably over a 10-year period beginning with the tax year the costs are incurred. The election applies only to current-year expenditures and is not binding in future years.
Pros and Cons
• Advantages: Immediate deduction and simplicity.
• Disadvantage: Amounts expensed by individuals are subject to 10-year amortization for AMT, unless taxpayer materially participates in the activity. [IRC
§56(b)(2)]
• Advantages: No AMT adjustment. Sixty-month amortization allows faster recovery than 10-year write off.
• Disadvantages: Amortization does not begin until economic benefit realized.
Once election is made, it applies to all later years, unless permission to revoke obtained from IRS.
• Advantages: No AMT adjustment required for costs written off over 10 years. This is also a flexible method. Taxpayer can choose each year the amount of costs that will be written off over 10 years (allowing taxpayer to reduce or avoid AMT).
• Disadvantage: May provide for longer write-off in many cases.
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
Tax Legislation ...................................................... Page 13-1
Selected Tax Law Changes Affecting Business
Assets ................................................................. Page 13-1
Glossary ................................................................ Page 13-3
and 2014 t
l
The following table identifies selected tax legislation enacted in
2009, 2010, 2011, and 2013 impacting 2014 and later tax returns.
Name of Act
Worker, Homeownership and Business
Assistance Act of 2009
Public Law
Number
PL 111-92
Hiring Incentives to Restore Employment (HIRE) Act PL 111-147
Patient Protection and Affordable Care Act
Health Care and Education Reconciliation Act of 2010
Small Business Jobs Act of 2010
Tax Relief Act of 2010
Comprehensive 1099 Taxpayer Protection and
Repayment of Exchange Subsidy Overpayments
Act of 2011 (the 1099 Act)
American Taxpayer Relief Act of 2012
PL 111-148
PL 111-152
PL 111-240
PL 111-312
PL 112-9
PL 112-240
Date of Enactment
11/6/09
3/18/10
3/23/10
3/30/10
9/27/10
12/17/10
4/14/11
1/2/13
Tax Increase Prevention Act of 2014 PL 113-295 12/19/14
Effective Dates 1 Page
Provision in Effect for 2013 Item
Business Property
Indian Reservation
Property—Shorter
Recovery Periods
Motorsports
Entertainment
2015
Complexes—Seven-
Year Recovery Period
Qualified Leasehold,
Restaurant and Retail
Improvement Property—
15-Year Recovery
Period
Property placed in service before
2014
Property placed in service before
2014
2-4
2-1,
2-2,
2-3,
2-7,
2-12,
7-1,
7-9,
7-10
Shortened recovery periods for both regular tax and AMT applied to qualified Indian reservation property placed in service before 2014.
Provision in Effect for 2014 is
Expired provision. Qualifying property was required to be placed in service before 2014 .
2015 is
Expired provision.
Qualifying property was required to be placed in service before 2014 .
Property placed in service before
2014
2015
Section 179—Election
Can Be Revoked
Tax years beginning before
2014
Section 179—Expensing for Off-the-Shelf
Software
2015
Software placed in service in a tax year beginning before 2014
Section 179—Increased
Deduction Limit
Property placed in service in 2013 2 and 2014 2
Section 179—Qualified
Real Property
Property placed in service in 2013 2 and 2014 2
2-3 Motorsports entertainment complexes were depreciated over a seven-year recovery period. [IRC §168(e)(3)(C)(ii) and IRC §168(i)
(15)]
Qualified leasehold improvements, qualified restaurant property and qualified retail improvements were assigned a 15-year (straight-line) recovery period. [IRC §168(e)(3)(E)]
2015
2014 are 2015
Expired provision.
Qualified leasehold improvements and qualified restaurant property were designated 15-year MACRS property if placed in service after October
22, 2004 and before 2014 . Qualified retail improvements were designated 15-year
MACRS property if placed in service after
2008 and before 2014 . If placed in service after 2013 , all three types of property are assigned a 39-year (straight-line) recovery period.
applies
Expired provision . The one-time ability to revoke a Section 179 election applied to tax years beginning after 2002 and before 2014 .
Section 179—Qualified
Zone Property
Property placed in service before
2014 2015
5−9 Generally, a Section 179 election can only be revoked with IRS consent. However, the ability to irrevocably revoke a Section 179 election without IRS consent for any property applied to tax years beginning after 2002 and before 2014. [IRC §179(c)(2)]
5−6,
11−4
2015
5 −1
Off-the-shelf computer software was eligible for the Section 179 election if placed in service in a tax year beginning after 2002 and before 2014. [IRC §179(d)(1)(A)(ii)]
The Section 179 deduction and qualifying property limits were
$500,000 and $2,000,000. [IRC §179(b)]
$2,000,000
5-6,
7-2
Taxpayers could claim the Section 179 deduction on up to $250,000 of qualified real property (qualified leasehold improvements, qualified restaurant property and qualified retail improvement property). [IRC §179(f)] is
5-2 An enterprise zone business that placed qualified zone property
(defined in Code Section 1397A) in service in an empowerment zone before 2014 could increase its Section 179 deduction and qualifying property limits. [IRC §1391(d) and IRC §1397A]
is 2015
Expired provision . Off-the-shelf computer software was Section 179 property if placed in service in a tax year beginning after 2002 and before 2014 . 2015 are $500,000
The limits have fallen to $25,000 and
$200,000 for property placed in service in a tax year beginning after 2013 .
Expired provision.
was
in 2014
Qualified real property
Section 179 property if placed in service in a tax year beginning in 2010 –
is
2013 .
2014
Expired provision . Qualifying property was required to be placed in service before 2014 .
2015
1
2
Many tax provisions scheduled to expire completely or to revert to former rules have been extended in the past. Tax professionals should monitor legislation to ascertain the current status of any tax provision.
Tax years beginning in such year.
Continued on the next page
2014 Tax Year | Depreciation Quickfinder ® Handbook 13-1 Replacement Page 1/2015

Special (Bonus)
Depreciation—
Allowance
2015
2016
Special (Bonus)
Depreciation—
Corporate Election to
Accelerate Certain
Credits In Lieu of
Claiming
2015
Property acquired and placed in service before
2014 (before
2015 for certain property)
Property placed in service in 2013
( 2014 for certain property)
2-12,
6-7
The 50% special depreciation allowance was available for new qualified property additions. The following allowance rates applied, depending on when the qualified property was acquired and placed in service:
[IRC §168(k)]
• 2008 – 2010:
– 1/1/08–9/8/10: 50%
– 9/9/10–12/31/10: 100%
• 2011: 100%
• 2012 and 2013: 50%
For long-production-period property and certain aircraft, the placedin-service dates were extended one year.
Note: For 2008 – 2013, the Section 280F limit on depreciation for passenger autos was also increased by $8,000 for qualified property, and no AMT adjustment applies to property for which the special depreciation allowance is claimed.
2-13 The election to forego the special depreciation allowance and instead
2014 increase the limit on certain credits is available for assets placed in service in 2011, 2012 and 2013 (2011 – 2014 for long-productionperiod property and certain aircraft) [IRC §168(k)(4)(D)]. The election
(available only to corporations) can be made for Round Two or
Round Three property, which is property eligible for the special depreciation allowance solely because it meets the requirements under the extension of the special depreciation allowance for certain property placed in service after 2010 (Round Two) or 2012 (Round
Three). However, corporations that have already made this election for an earlier year can elect to not apply the election to Round Two or Round Three property. Also, for Round Two or Round Three property, the limit on unused research credits cannot be increased by making this election.
For long-production-period property and certain aircraft, the placed-in-service dates are extended one year.
Note: For 2014, the Section 280F limit on depreciation for passenger autos is also increased by $8,000 for qualified property, and no AMT adjustment applies to property for which the special depreciation allowance is claimed.
The election to forego the special depreciation allowance and increase the limits on certain credits is only available for long-productionperiod property and certain aircraft placed in service in 2014.
This election is also available for long-production-period property and certain aircraft placed in service in 2015.
Tax Credits
Energy Efficient Homes
Property
2015
Incremental Research
Nonbusiness Energy
Qualified new energy efficient homes acquired from an eligible contractor before
2014
Qualified research expenditures
7-8 A credit was available to eligible contractors who constructed or manufactured homes that met certain energy efficiency standards.
[IRC §45L(g)] incurred before
2014
Qualified property placed in service before 2014
Qualified property acquired after 2011 and before 2014
11-9 A credit was available for the cost of increasing research activities.
[IRC §41]
7-8 The $500 lifetime credit for qualified energy efficiency improvements
2015 and expenditures to a taxpayer’s principal residence was available for property placed in service in 2013. (IRC §25C)
6-12 Taxpayers who purchased a qualified 2- or 3-wheel plug-in electric vehicle could take a credit of up to $2,500. [IRC §30D(g)]
Expired provision.
Eligible contractors were allowed a credit for qualified homes acquired before 2014 by a person for use as a residence.
before 2014 .
2015
Expired provision.
2015
A credit
is
Expired provision.
A credit was available for the cost of increasing research activities was
is
available for property placed in service before 2014 .
Plug-in Electric
Vehicles—2- and
3-Wheeled Vehicles
Expired provision. A credit was available for 2- or 3-wheel plug-in electric vehicles purchased before 2014.
Caution: Taxpayers who purchase a qualified four-wheeled plug-in electric vehicle after 2009 are eligible for a credit of up to $7,500 (IRC
§30D). See Credits for Plug-In Vehicles on
Page 6-12 for applicable rules and a table of certified vehicles.
Taxes and Rates
Long-Term Capital
Gains and Qualified
Dividends Rate
Net Investment
Income (NII) Tax
2013 and later
2013 and later
8-2 The 15% maximum rate on long-term capital gains and qualified dividends applies to the extent taxable income does not exceed
$400,000 (Single), $425,000 (HOH), $450,000 (MFJ or QW) and
$225,000 (MFS). When taxable income exceeds those amounts, a
20% rate applies to long-term capital gains and qualified dividends
(to the lesser of such gains and dividends or taxable income in excess of the threshold amount). These rates apply for regular tax and AMT. [IRC §1(h)]
8-16 Individuals with modified AGI (MAGI) over $200,000 ($250,000 if
MFJ or QW; $125,000 if MFS) are subject to a 3.8% additional tax on NII (or if less, on the excess of MAGI over the threshold amount).
NII generally includes interest, dividends, royalties, rents, gross income from a passive trade or business and net gain from property dispositions (other than most property held for use in a nonpassive trade or business). NII is reduced by deductions allocable to such income. The tax also applies to estates and trusts. (IRC §1411)
The 15% maximum rate on long-term capital gains and qualified dividends applies to the extent taxable income does not exceed $406,750 (Single), $432,200 (HOH),
$457,600 (MFJ or QW) and $228,800
(MFS). When taxable income exceeds those amounts, a 20% rate applies as explained in the 2013 column.
Same as 2013. Unlike the long-term capital gain and qualified dividend taxable income threshold amounts referenced above, the NII tax MAGI threshold amounts are not adjusted for inflation.
1
2
Many tax provisions scheduled to expire completely or to revert to former rules have been extended in the past. Tax professionals should monitor legislation to ascertain the current status of any tax provision.
Tax years beginning in such year.
are
2015
13-2 2014 Tax Year | Depreciation Quickfinder ® Handbook Replacement Page 1/2015

Depreciable property: Property that is (1) owned by the taxpayer,
(2) used in a business or investment activity, (3) has a determinable useful life and (4) expected to last more than one year.
Depreciable real property: Buildings and their structural components, other inherently permanent structures and certain land improvements.
Depreciation: The annual deduction for the cost of tangible and intangible business or investment property over a specified number of years.
Disaster assistance property: An increased Section 179 deduction was available for qualified Section 179 disaster assistance property placed in service in a federally declared disaster area if the disaster occurred before 2010. The property must be placed in service by the last day of the third calendar year following the applicable disaster date. A list of the federally declared disaster areas is available at www.fema.gov
.
Disposition: The permanent withdrawal from use in a trade or business or from the production of income.
Documentary evidence: Written records that establish certain facts.
Economic owner: The party who bears the economic risks and rewards related to the property.
Economic useful life : The economic useful life of a unit of property is generally the period over which the property may reasonably be expected to be useful to the taxpayer in its trade or business or for the production of income.
Electric vehicle: A vehicle that is powered primarily by an electric motor drawing current from rechargeable batteries, fuel cells or other portable sources of electrical power.
Employer provided cell phones: When provided primarily for noncompensatory business reasons, neither the business nor personal use of the phone results in income to the employee, and no recordkeeping of usage is required. (Notice 2011-72)
Empowerment zone: An area designated by the Secretaries of
Agriculture and HUD as eligible for certain tax incentives. The designations generally remained in effect through December 31,
2014
Handbook , empowerment zone designations had not been extended to 2014.
Parts of the following urban areas were listed as 2013 empowerment zones in the
2013 instructions for Form 8844, Empowerment Zone Employment Credit :
• Pulaski County, AR
• Tucson, AZ
• Fresno, CA
• Los Angeles, CA (city and county)
• Santa Ana, CA
• New Haven, CT
• Jacksonville, FL
• Miami/Dade County, FL
• Chicago, IL
• Gary/Hammond/East Chicago, IN
• Boston, MA
• Baltimore, MD
• Detroit, MI
• Minneapolis, MN
• St. Louis, MO
• East St. Louis, IL
• Cumberland County, NJ
• New York, NY
• Syracuse, NY
• Yonkers, NY
• Cincinnati, OH
• Cleveland, OH
• Columbus, OH
• Oklahoma City, OK
• Philadelphia, PA
• Camden, NJ
• Columbia/Sumter, SC
• Knoxville, TN
• El Paso, TX
• San Antonio, TX
• Norfolk/Portsmouth, VA
• Huntington, WV
• Ironton, OH
• Washington, DC (part of DC) through 2011
Table continued in the next column
• Desert Communities, CA (part of
Riverside County)
• Southwest Georgia United, GA (part of
Crisp County and all of Dooly County)
• Southernmost Illinois Delta, IL (parts of
Alexander and Johnson Counties and all of Pulaski County)
• Kentucky Highlands, KY (part of
Wayne County and all of Clinton and
Jackson Counties)
• Aroostook County, ME (part of
Aroostook County)
• Mid-Delta, MS (parts of Bolivar,
Holmes, Humphreys, Leflore,
Sunflower and Washington Counties)
• Griggs-Steele, ND (part of Griggs
County and all of Steele County)
• Oglala Sioux Tribe, SD (part of
Jackson County and all of Bennett and Shannon Counties)
• Middle Rio Grande FUTURO
Communities, TX (parts of Dimmit,
Maverick, Uvalde and Zavala
Counties)
• Rio Grande Valley, TX (parts of
Cameron, Hidalgo, Starr and
Willacy Counties)
For details, use the EZ/RC Address Locator at http://egis.hud.gov/ezrclocator to determine whether a location is in an empowerment zone.
Exchange: To barter, swap, part with, give or transfer property for other property or services.
Fair market value (FMV): The price that property brings when it is offered for sale by one who is willing but not obligated to sell, and is bought by one who is willing or desires to buy but is not compelled to do so.
Farm property: Assets used in agriculture, such as machinery and equipment, grain bins and fences.
Federally declared disaster area: Formerly called a Presidentially declared disaster area, it is the area that is determined by the President to warrant assistance by the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act for disasters declared in tax years beginning after
December 31, 2007.
Fiduciary: The one who acts on behalf of another as a guardian, trustee, executor, administrator, receiver or conservator.
Foreclosure: Lender takes property securing a mortgage in satisfaction of the debt.
Fungible commodity: A commodity of a nature that one part may be used in place of another part.
General asset account (GAA): An elective grouping of depreciable assets that have the following attributes in common:
• Depreciation method,
• Recovery period,
• Convention (for example, half-year convention) and
• Tax year in which they were placed in service.
General depreciation system (GDS): The method of computing depreciation under the Modified Cost Recovery System (MACRS) absent any election or requirement to use another method. Under the general depreciation system, every asset is assigned a recovery period, depreciation method and convention, which are used to determine the annual depreciation deductions.
Goodwill: An intangible property such as the advantage or benefit received in property beyond its mere value. It is not confined to a name but can also be attached to a particular area where business is transacted, to a list of customers or to other elements of value in business as a going concern.
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Operating lease: A lease under which the lessor is the economic owner. For tax, this is treated as a rental arrangement.
Organizational costs: Costs incurred in the creation of a business entity, governed by Section 248 for corporations and Section
709 for partnerships. Examples include (1) legal services incurred in drafting corporate documents or a partnership agreement,
(2) accounting services required when organizing the entity, (3) expenses of temporary directors, (4) organizational meetings of directors, shareholders and partners and (5) fees paid to the state of incorporation or organization.
Passenger automobiles: For depreciation purposes, four-wheeled vehicles having an unloaded gross weight of 6,000 pounds or less (6,000 pounds or less loaded gross vehicle weight for trucks and vans) that are manufactured primarily for use on public roads. Certain vehicles, such as ambulances, hearses, vehicles used to transport people or goods for hire and vehicles not likely to be used for personal use are excepted. Passenger autos are subject to annual depreciation limits.
Personal property: Property other than real property which is of either a tangible or intangible nature.
Placed in service: Ready and available for a specific use whether in a trade or business, the production of income, a tax-exempt activity or a personal activity.
Property class: A category for property under MACRS. It generally determines the depreciation method, recovery period and convention.
Qualified cellulosic biofuel plant property: Plant property used solely in the U.S. to produce any liquid fuel produced from lignocellulosic or hemicellulosic matter (refers to plant matter or biomass, such as corn stalks) that is available on a renewable or recurring basis.
Qualified disaster assistance property: Property used in an active trade or business that is either:
1) MACRS property with a recovery period of 20 years or less,
2) Computer software,
3) Water utility property,
4) Qualified leasehold improvement property,
5) Nonresidential real property or
6) Residential rental property.
Qualified disaster expenses: Expenses related to a federally declared disaster area that are:
1) Connected to a trade or business or to business-related property;
2) For any of the following reasons:
• Abatement or control of hazardous substances that were released,
• Removal of debris from, or the demolition of structures on, damaged or destroyed business-related real property or
• Repair of damaged business-related property;
3) Otherwise chargeable to a capital account and
4) Paid or incurred after 2007 for disasters declared after 2007.
Qualified electric vehicle (QEV): A vehicle that is powered primarily by an electric motor drawing current from rechargeable batteries, fuel cells or other portable sources of electrical power.
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Qualified intermediary: In a like-kind exchange, a person who is not the taxpayer or a disqualified person who enters into a written agreement with the taxpayer to facilitate the transaction necessary to complete a deferred exchange.
Qualified joint interest: A qualified joint interest is any interest in property held by husband and wife as either of the following:
• Tenants by the entirety.
• Joint tenants with right of survivorship if hus band and wife are the only joint tenants.
Qualified leasehold improvement property: A leasehold improvement that meets the following four tests:
• The improvement is to an interior portion of a building (not a common area).
• The building is nonresidential real property.
• The improvement was made pursuant to a lease by the lessee, sub-lessee or the lessor (landlord) to property to be occupied exclusively by the lessee or sub-lessee.
• The improvement is placed in service more than three years after the date the building was first placed in service.
See Qualified Leasehold Improvements on Page 7-9.
Qualified NY Liberty Zone property: Property that is any of the following if at least 80% of its use is in the taxpayer’s trade or business in the NY Liberty Zone:
• MACRS property with a recovery period of 20 years or less.
• Property that is an integral part of the gathering, treatment or commercial distribution of water that, absent the special rules for NY Liberty Zone property, would be 20-year property.
• Any municipal sewer.
• Computer software that is readily available for purchase by the general public, is subject to a nonexclusive license and has not been substantially modified.
• Nonresidential real property and residential rental property to the extent it rehabilitates or replaces real property damaged or destroyed as a result of the terrorist attacks of September 11,
2001.
2014
Qualified real property: Certain real property that is eligible for up to $250,000 of Section 179 expense in 20102013 . Includes qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property.
See Qualified Real Property on Page 5-8.
Qualified restaurant property: Any Section 1250 improvement to a building if: (1) the improvement is placed in service more than three years after the date the building was first placed in service, and (2) more than 50% of the building’s square footage is devoted to the preparation of, and seating for, on-premises consumption of prepared meals.
See Qualified Restaurant Property on Page 7-10.
Qualified retail improvement property: An improvement to an interior portion of a building that is nonresidential real property if:
(1) that portion is open to the general public and is used in the retail trade or business of selling tangible personal property to the general public and (2) the improvement is placed in service more than three years after the date the building was first placed in service.
See Qualified Retail Improvement Property on Page 7-10.
Real property: Land, improvements and buildings thereon, including attached items and growing things.
Recapture: To include as income an amount allowed or allowable as a deduction in a prior year.
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