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State Nm Us Tax

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State Nm Us Tax

State nm us tax 7. State nm us tax   Depreciation, Depletion, and Amortization Table of Contents What's New for 2013 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Overview of DepreciationWhat Property Can Be Depreciated? What Property Cannot Be Depreciated? When Does Depreciation Begin and End? Can You Use MACRS To Depreciate Your Property? What Is the Basis of Your Depreciable Property? How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions? Section 179 Expense DeductionWhat Property Qualifies? What Property Does Not Qualify? How Much Can You Deduct? How Do You Elect the Deduction? When Must You Recapture the Deduction? Claiming the Special Depreciation AllowanceWhat is Qualified Property? How Can You Elect Not To Claim the Allowance? When Must You Recapture an Allowance Figuring Depreciation Under MACRSWhich Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS? What Is the Placed-in-Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies? Which Convention Applies? Which Depreciation Method Applies? How Is the Depreciation Deduction Figured? How Do You Use General Asset Accounts? When Do You Recapture MACRS Depreciation? Additional Rules for Listed PropertyWhat Is Listed Property? What Is the Business-Use Requirement? Do the Passenger Automobile Limits Apply? Depletion Who Can Claim Depletion? Figuring Depletion AmortizationBusiness Start-Up Costs Reforestation Costs Section 197 Intangibles What's New for 2013 Increased section 179 expense deduction dollar limits. State nm us tax  The maximum amount you can elect to deduct for most section 179 property you placed in service in 2013 is $500,000. State nm us tax This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. State nm us tax See Dollar Limits under Section 179 Expense Deduction , later. State nm us tax Extension of special depreciation allowance for certain qualified property acquired after December 31, 2007. State nm us tax . State nm us tax  You may be able to take a 50% special depreciation allowance for certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. State nm us tax See Claiming the Special Depreciation Allowance , later. State nm us tax Expiration of the 3- year recovery period for certain race horses. State nm us tax  The 3-year recovery period for race horses two years old or younger will expire for such horses placed in service after December 31, 2013. State nm us tax Introduction If you buy or make improvements to farm property such as machinery, equipment, livestock, or a structure with a useful life of more than a year, you generally cannot deduct its entire cost in one year. State nm us tax Instead, you must spread the cost over the time you use the property and deduct part of it each year. State nm us tax For most types of property, this is called depreciation. State nm us tax This chapter gives information on depreciation methods that generally apply to property placed in service after 1986. State nm us tax For information on depreciating pre-1987 property, see Publication 534, Depreciating Property Placed in Service Before 1987. State nm us tax Topics - This chapter discusses: Overview of depreciation Section 179 expense deduction Special depreciation allowance Modified Accelerated Cost Recovery System (MACRS) Listed property Basic information on cost depletion (including timber depletion) and percentage depletion Amortization of the costs of going into business, reforestation costs, the costs of pollution control facilities, and the costs of section 197 intangibles Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) T (Timber), Forest Activities Schedule 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. State nm us tax It is important to keep good records for property you depreciate. State nm us tax Do not file these records with your return. State nm us tax Instead, you should keep them as part of the permanent records of the depreciated property. State nm us tax They will help you verify the accuracy of the depreciation of assets placed in service in the current and previous tax years. State nm us tax For general information on recordkeeping, see Publication 583, Starting a Business and Keeping Records. State nm us tax For specific information on keeping records for section 179 property and listed property, see Publication 946, How To Depreciate Property. State nm us tax Overview of Depreciation This overview discusses basic information on the following. State nm us tax What property can be depreciated. State nm us tax What property cannot be depreciated. State nm us tax When depreciation begins and ends. State nm us tax Whether MACRS can be used to figure depreciation. State nm us tax What is the basis of your depreciable property. State nm us tax How to treat repairs and improvements. State nm us tax When you must file Form 4562. State nm us tax How you can correct depreciation claimed incorrectly. State nm us tax What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, equipment, vehicles, certain livestock, and furniture. State nm us tax You can also depreciate certain intangible property, such as copyrights, patents, and computer software. State nm us tax To be depreciable, the property must meet all the following requirements. State nm us tax It must be property you own. State nm us tax It must be used in your business or income-producing activity. State nm us tax It must have a determinable useful life. State nm us tax It must have a useful life that extends substantially beyond the year you place it in service. State nm us tax Property You Own To claim depreciation, you usually must be the owner of the property. State nm us tax You are considered as owning property even if it is subject to a debt. State nm us tax Leased property. State nm us tax   You can depreciate leased property only if you retain the incidents of ownership in the property. State nm us tax This means you bear the burden of exhaustion of the capital investment in the property. State nm us tax Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. State nm us tax You can, however, depreciate any capital improvements you make to the leased property. State nm us tax See Additions and Improvements under Which Recovery Period Applies in chapter 4 of Publication 946. State nm us tax   If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. State nm us tax However, you cannot depreciate the cost of the property if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased. State nm us tax Life tenant. State nm us tax   Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. State nm us tax See Certain term interests in property , later, for an exception. State nm us tax Property Used in Your Business or Income-Producing Activity To claim depreciation on property, you must use it in your business or income-producing activity. State nm us tax If you use property to produce income (investment use), the income must be taxable. State nm us tax You cannot depreciate property that you use solely for personal activities. State nm us tax However, if you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the percentage of business or investment use. State nm us tax Example 1. State nm us tax   If you use your car for farm business, you can deduct depreciation based on its percentage of use in farming. State nm us tax If you also use it for investment purposes, you can depreciate it based on its percentage of investment use. State nm us tax Example 2. State nm us tax   If you use part of your home for business, you may be able to deduct depreciation on that part based on its business use. State nm us tax For more information, see Business Use of Your Home in chapter 4. State nm us tax Inventory. State nm us tax   You can never depreciate inventory because it is not held for use in your business. State nm us tax Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. State nm us tax Livestock. State nm us tax   Livestock purchased for draft, breeding, or dairy purposes can be depreciated only if they are not kept in an inventory account. State nm us tax Livestock you raise usually has no depreciable basis because the costs of raising them are deducted and not added to their basis. State nm us tax However, see Immature livestock under When Does Depreciation Begin and End , later, for a special rule. State nm us tax Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. State nm us tax This means it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. State nm us tax Irrigation systems and water wells. State nm us tax   Irrigation systems and wells used in a trade or business can be depreciated if their useful life can be determined. State nm us tax You can depreciate irrigation systems and wells composed of masonry, concrete, tile, metal, or wood. State nm us tax In addition, you can depreciate costs for moving dirt to construct irrigation systems and water wells composed of these materials. State nm us tax However, land preparation costs for center pivot irrigation systems are not depreciable. State nm us tax Dams, ponds, and terraces. State nm us tax   In general, you cannot depreciate earthen dams, ponds, and terraces unless the structures have a determinable useful life. State nm us tax What Property Cannot Be Depreciated? Certain property cannot be depreciated, even if the requirements explained earlier are met. State nm us tax This includes the following. State nm us tax Land. State nm us tax You can never depreciate the cost of land because land does not wear out, become obsolete, or get used up. State nm us tax The cost of land generally includes the cost of clearing, grading, planting, and landscaping. State nm us tax Although you cannot depreciate land, you can depreciate certain costs incurred in preparing land for business use. State nm us tax See chapter 1 of Publication 946. State nm us tax Property placed in service and disposed of in the same year. State nm us tax Determining when property is placed in service is explained later. State nm us tax Equipment used to build capital improvements. State nm us tax You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. State nm us tax Intangible property such as section 197 intangibles. State nm us tax This property does not have a determinable useful life and generally cannot be depreciated. State nm us tax However, see Amortization , later. State nm us tax Special rules apply to computer software (discussed below). State nm us tax Certain term interests (discussed below). State nm us tax Computer software. State nm us tax   Computer software is generally not a section 197 intangible even if acquired in connection with the acquisition of a business, if it meets all of the following tests. State nm us tax It is readily available for purchase by the general public. State nm us tax It is subject to a nonexclusive license. State nm us tax It has not been substantially modified. State nm us tax   If the software meets the tests above, it can be depreciated and may qualify for the section 179 expense deduction and the special depreciation allowance (if applicable), discussed later. State nm us tax Certain term interests in property. State nm us tax   You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. State nm us tax This rule does not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. State nm us tax For more information, see chapter 1 of Publication 946. State nm us tax When Does Depreciation Begin and End? You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. State nm us tax You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. State nm us tax Placed in Service Property is placed in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. State nm us tax Even if you are not using the property, it is in service when it is ready and available for its specific use. State nm us tax Example. State nm us tax You bought a planter for use in your farm business. State nm us tax The planter was delivered in December 2012 after harvest was over. State nm us tax You begin to depreciate the planter for 2012 because it was ready and available for its specific use in 2012, even though it will not be used until the spring of 2013. State nm us tax If your planter comes unassembled in December 2012 and is put together in February 2013, it is not placed in service until 2013. State nm us tax You begin to depreciate it in 2013. State nm us tax If your planter was delivered and assembled in February 2013 but not used until April 2013, it is placed in service in February 2013, because this is when the planter was ready for its specified use. State nm us tax You begin to depreciate it in 2013. State nm us tax Fruit or nut trees and vines. State nm us tax   If you acquire an orchard, grove, or vineyard before the trees or vines have reached the income-producing stage, and they have a preproductive period of more than 2 years, you must capitalize the preproductive-period costs under the uniform capitalization rules (unless you elect not to use these rules). State nm us tax See chapter 6 for information about the uniform capitalization rules. State nm us tax Your depreciation begins when the trees and vines reach the income-producing stage (that is, when they bear fruit, nuts, or grapes in quantities sufficient to commercially warrant harvesting). State nm us tax Immature livestock. State nm us tax   Depreciation for livestock begins when the livestock reaches the age of maturity. State nm us tax If you bought immature livestock for drafting purposes, depreciation begins when they can be worked. State nm us tax If you bought immature livestock for dairy purposes, depreciation begins when they can be milked. State nm us tax If you bought immature livestock for breeding purposes, depreciation begins when they can be bred. State nm us tax Your basis for depreciation is your initial cost for the immature livestock. State nm us tax Idle Property Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle. State nm us tax For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine. State nm us tax Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. State nm us tax This happens when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. State nm us tax Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. State nm us tax You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. State nm us tax You sell or exchange the property. State nm us tax You convert the property to personal use. State nm us tax You abandon the property. State nm us tax You transfer the property to a supplies or scrap account. State nm us tax The property is destroyed. State nm us tax For information on abandonment of property, see chapter 8. State nm us tax For information on destroyed property, see chapter 11 and Publication 547, Casualties, Disasters, and Thefts. State nm us tax Can You Use MACRS To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most business and investment property placed in service after 1986. State nm us tax MACRS is explained later under Figuring Depreciation Under MACRS . State nm us tax You cannot use MACRS to depreciate the following property. State nm us tax Property you placed in service before 1987. State nm us tax Use the methods discussed in Publication 534. State nm us tax Certain property owned or used in 1986. State nm us tax See chapter 1 of Publication 946. State nm us tax Intangible property. State nm us tax Films, video tapes, and recordings. State nm us tax Certain corporate or partnership property acquired in a nontaxable transfer. State nm us tax Property you elected to exclude from MACRS. State nm us tax For more information, see chapter 1 of Publication 946. State nm us tax What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. State nm us tax To determine basis, you need to know the cost or other basis of your property. State nm us tax Cost or other basis. State nm us tax   The basis of property you buy is usually its cost plus amounts you paid for items such as sales tax, freight charges, and installation and testing fees. State nm us tax The cost includes the amount you pay in cash, debt obligations, other property, or services. State nm us tax   There are times when you cannot use cost as basis. State nm us tax In these situations, the fair market value (FMV) or the adjusted basis of the property may be used. State nm us tax Adjusted basis. State nm us tax   To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. State nm us tax Basis adjustment for depreciation allowed or allowable. State nm us tax   After you place your property in service, you must reduce the basis of the property by the depreciation allowed or allowable, whichever is greater. State nm us tax Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). State nm us tax Depreciation allowable is depreciation you are entitled to deduct. State nm us tax   If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. State nm us tax   If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed). State nm us tax   For more information, see chapter 6. State nm us tax How Do You Treat Repairs and Improvements? You generally deduct the cost of repairing business property in the same way as any other business expense. State nm us tax However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. State nm us tax Treat improvements as separate depreciable property. State nm us tax See chapter 1 of Publication 946 for more information. State nm us tax Example. State nm us tax You repair a small section on a corner of the roof of a barn that you rent to others. State nm us tax You deduct the cost of the repair as a business expense. State nm us tax However, if you replace the entire roof, the new roof is considered to be an improvement because it increases the value and lengthens the life for the property. State nm us tax You depreciate the cost of the new roof. State nm us tax Improvements to rented property. State nm us tax   You can depreciate permanent improvements you make to business property you rent from someone else. State nm us tax Do You Have To File Form 4562? Use Form 4562 to claim your deduction for depreciation and amortization. State nm us tax You must complete and attach Form 4562 to your tax return if you are claiming any of the following. State nm us tax A section 179 expense deduction for the current year or a section 179 carryover from a prior year. State nm us tax Depreciation for property placed in service during the current year. State nm us tax Depreciation on any vehicle or other listed property, regardless of when it was placed in service. State nm us tax Amortization of costs that began in the current year. State nm us tax For more information, see the Instructions for Form 4562. State nm us tax How Do You Correct Depreciation Deductions? If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. State nm us tax You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. State nm us tax You claimed the incorrect amount because of a mathematical error made in any year. State nm us tax You claimed the incorrect amount because of a posting error made in any year, for example, omitting an asset from the depreciation schedule. State nm us tax You have not adopted a method of accounting for the property placed in service by you in tax years ending after December 29, 2003. State nm us tax You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. State nm us tax Note. State nm us tax You have adopted a method of accounting if you used the same incorrect method of depreciation for two or more consecutively filed returns. State nm us tax If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. State nm us tax See the Instructions for Form 3115. State nm us tax Section 179 Expense Deduction You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. State nm us tax This is the section 179 expense deduction. State nm us tax You can elect the section 179 expense deduction instead of recovering the cost by taking depreciation deductions. State nm us tax This part of the chapter explains the rules for the section 179 expense deduction. State nm us tax It explains what property qualifies for the deduction, what property does not qualify for the deduction, the limits that may apply, how to elect the deduction, and when you may have to recapture the deduction. State nm us tax For more information, see chapter 2 of Publication 946. State nm us tax What Property Qualifies? To qualify for the section 179 expense deduction, your property must meet all the following requirements. State nm us tax It must be eligible property. State nm us tax It must be acquired for business use. State nm us tax It must have been acquired by purchase. State nm us tax Eligible Property To qualify for the section 179 expense deduction, your property must be one of the following types of depreciable property. State nm us tax Tangible personal property. State nm us tax Qualified real property. State nm us tax (Special rules apply to qualified real property that you elect to treat as qualified section 179 real property. State nm us tax For more information, see chapter 2 of Publication 946 and section 179(f) of the Internal Revenue Code. State nm us tax ) 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; A research facility used in connection with any of the activities in (a) above; or A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities. State nm us tax Single purpose agricultural (livestock) or horticultural structures. State nm us tax Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. State nm us tax Off-the-shelf computer software that is readily available for purchase by the general public, is subject to a nonexclusive lease, and has not been substantially modified. State nm us tax Tangible personal property. State nm us tax   Tangible personal property is any tangible property that is not real property. State nm us tax It includes the following property. State nm us tax Machinery and equipment. State nm us tax Property contained in or attached to a building (other than structural components), such as milk tanks, automatic feeders, barn cleaners, and office equipment. State nm us tax Gasoline storage tanks and pumps at retail service stations. State nm us tax Livestock, including horses, cattle, hogs, sheep, goats, and mink and other fur-bearing animals. State nm us tax Facility used for the bulk storage of fungible commodities. State nm us tax   A facility used for the bulk storage of fungible commodities is qualifying property for purposes of the section 179 expense deduction if it is used in connection with any of the activities listed earlier in item (3)(a). State nm us tax Bulk storage means the storage of a commodity in a large mass before it is used. State nm us tax Grain bins. State nm us tax   A grain bin is an example of a storage facility that is qualifying section 179 property. State nm us tax It is a facility used in connection with the production of grain or livestock for the bulk storage of fungible commodities. State nm us tax Single purpose agricultural or horticultural structures. State nm us tax   A single purpose agricultural (livestock) or horticultural structure is qualifying property for purposes of the section 179 expense deduction. State nm us tax Agricultural structure. State nm us tax   A single purpose agricultural (livestock) structure is any building or enclosure specifically designed, constructed, and used for both the following reasons. State nm us tax To house, raise, and feed a particular type of livestock and its produce. State nm us tax To house the equipment, including any replacements, needed to house, raise, or feed the livestock. State nm us tax For this purpose, livestock includes poultry. State nm us tax   Single purpose structures are qualifying property if used, for example, to breed chickens or hogs, produce milk from dairy cattle, or produce feeder cattle or pigs, broiler chickens, or eggs. State nm us tax The facility must include, as an integral part of the structure or enclosure, equipment necessary to house, raise, and feed the livestock. State nm us tax Horticultural structure. State nm us tax   A single purpose horticultural structure is either of the following. State nm us tax A greenhouse specifically designed, constructed, and used for the commercial production of plants. State nm us tax A structure specifically designed, constructed, and used for the commercial production of mushrooms. State nm us tax Use of structure. State nm us tax   A structure must be used only for the purpose that qualified it. State nm us tax For example, a hog barn will not be qualifying property if you use it to house poultry. State nm us tax Similarly, using part of your greenhouse to sell plants will make the greenhouse nonqualifying property. State nm us tax   If a structure includes work space, the work space can be used only for the following activities. State nm us tax Stocking, caring for, or collecting livestock or plants or their produce. State nm us tax Maintaining the enclosure or structure. State nm us tax Maintaining or replacing the equipment or stock enclosed or housed in the structure. State nm us tax Property Acquired by Purchase To qualify for the section 179 expense deduction, your property must have been acquired by purchase. State nm us tax For example, property acquired by gift or inheritance does not qualify. State nm us tax Property acquired from a related person (that is, your spouse, ancestors, or lineal descendants) is not considered acquired by purchase. State nm us tax Example. State nm us tax Ken is a farmer. State nm us tax He purchased two tractors, one from his brother and one from his father. State nm us tax He placed both tractors in service in the same year he bought them. State nm us tax The tractor purchased from his father does not qualify for the section 179 expense deduction because he is a related person (as defined above). State nm us tax The tractor purchased from his brother does qualify for the deduction because Ken is not a related person (as defined above). State nm us tax What Property Does Not Qualify? Land and improvements. State nm us tax   Land and land improvements, do not qualify as section 179 property. State nm us tax Land improvements include nonagricultural fences, swimming pools, paved parking areas, wharves, docks, bridges, and fences. State nm us tax However, agricultural fences do qualify as section 179 property. State nm us tax Similarly, field drainage tile also qualifies as section 179 property. State nm us tax Excepted property. State nm us tax   Even if the requirements explained in the preceding discussions are met, farmers cannot elect the section 179 expense deduction for the following property. State nm us tax Certain property you lease to others (if you are a noncorporate lessor). State nm us tax Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. State nm us tax Property used by a tax-exempt organization (other than a tax-exempt farmers' cooperative) unless the property is used mainly in a taxable unrelated trade or business. State nm us tax Property used by governmental units or foreign persons or entities (except property used under a lease with a term of less than 6 months). State nm us tax How Much Can You Deduct? Your section 179 expense deduction is generally the cost of the qualifying property. State nm us tax However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. State nm us tax These limits apply to each taxpayer, not to each business. State nm us tax However, see Married individuals under Dollar Limits , later. State nm us tax See also the special rules for applying the limits for partnerships and S corporations under Partnerships and S Corporations , later. State nm us tax If you deduct only part of the cost of qualifying property as a section 179 expense deduction, you can generally depreciate the cost you do not deduct. State nm us tax Use Part I of Form 4562 to figure your section 179 expense deduction. State nm us tax Partial business use. State nm us tax   When you use property for business and nonbusiness purposes, you can elect the section 179 expense deduction only if you use it more than 50% for business in the year you place it in service. State nm us tax If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. State nm us tax Use the resulting business cost to figure your section 179 expense deduction. State nm us tax Trade-in of other property. State nm us tax   If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 expense deduction includes only the cash you paid. State nm us tax For example, if you buy (for cash and a trade-in) a new tractor for use in your business, your cost for the section 179 expense deduction is the cash you paid. State nm us tax It does not include the adjusted basis of the old tractor you trade for the new tractor. State nm us tax Example. State nm us tax J-Bar Farms traded two cultivators having a total adjusted basis of $6,800 for a new cultivator costing $13,200. State nm us tax They received an $8,000 trade-in allowance for the old cultivators and paid $5,200 cash for the new cultivator. State nm us tax J-Bar also traded a used pickup truck with an adjusted basis of $8,000 for a new pickup truck costing $35,000. State nm us tax They received a $5,000 trade-in allowance and paid $30,000 cash for the new pickup truck. State nm us tax Only the cash paid by J-Bar qualifies for the section 179 expense deduction. State nm us tax J-Bar's business costs that qualify for a section 179 expense deduction are $35,200 ($5,200 + $30,000). State nm us tax Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 is $500,000. State nm us tax If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 expense deduction among the items in any way, as long as the total deduction is not more than $500,000. State nm us tax Qualified real property that you elect to treat as section 179 property is limited to $250,000 of the maximum section 179 deduction of $500,000 for 2013. State nm us tax You do not have to claim the full $500,000. State nm us tax For specific information on the section 179 dollar limits, see chapter 2 of Publication 946. State nm us tax Reduced dollar limit for cost exceeding $2 million. State nm us tax   If the cost of your qualifying section 179 property placed in service in 2013 is over $2 million, you must reduce the dollar limit (but not below zero) by the amount of cost over $2 million. State nm us tax If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 expense deduction and you cannot carry over the cost that is more than $2,500,000. State nm us tax Example. State nm us tax This year, James Smith placed in service machinery costing $2,050,000. State nm us tax Because this cost is $50,000 more than $2 million, he must reduce his dollar limit to $450,000 ($500,000 − $50,000). State nm us tax Limits for sport utility vehicles. State nm us tax   The total amount you can elect to deduct for certain sport utility vehicles and certain other vehicles placed in service in 2013 is $25,000. State nm us tax This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, and highways that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. State nm us tax   For more information, see chapter 2 of Publication 946. State nm us tax Limits for passenger automobiles. State nm us tax   For a passenger automobile that is placed in service in 2013, the total section 179 and depreciation deduction is limited. State nm us tax See Do the Passenger Automobile Limits Apply , later. State nm us tax Married individuals. State nm us tax   If you are married, how you figure your section 179 expense deduction depends on whether you file jointly or separately. State nm us tax If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. State nm us tax If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2 million. State nm us tax You must allocate the dollar limit (after any reduction) equally between you, unless you both elect a different allocation. State nm us tax If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. State nm us tax Joint return after separate returns. State nm us tax   If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts. State nm us tax The dollar limit (after reduction for any cost of section 179 property over $2 million). State nm us tax The total cost of section 179 property you and your spouse elected to expense on your separate returns. State nm us tax Business Income Limit The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. State nm us tax Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business. State nm us tax Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. State nm us tax See Carryover of disallowed deduction , later. State nm us tax Taxable income. State nm us tax   In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. State nm us tax In addition to net income or loss from a sole proprietorship, partnership, or S corporation, net income or loss derived from a trade or business also includes the following items. State nm us tax Section 1231 gains (or losses) as discussed in chapter 9. State nm us tax Interest from working capital of your trade or business. State nm us tax Wages, salaries, tips, or other pay earned by you (or your spouse if you file a joint return) as an employee of any employer. State nm us tax   In addition, figure taxable income without regard to any of the following. State nm us tax The section 179 expense deduction. State nm us tax The self-employment tax deduction. State nm us tax Any net operating loss carryback or carryforward. State nm us tax Any unreimbursed employee business expenses. State nm us tax Two different taxable income limits. State nm us tax   In addition to the business income limit for your section 179 expense deduction, you may have a taxable income limit for some other deduction (for example, charitable contributions). State nm us tax You may have to figure the limit for this other deduction taking into account the section 179 expense deduction. State nm us tax If so, complete the following steps. State nm us tax Step Action 1 Figure taxable income without the section 179 expense deduction or the other deduction. State nm us tax 2 Figure a hypothetical section 179 expense deduction using the taxable income figured in Step 1. State nm us tax 3 Subtract the hypothetical section 179 expense deduction figured in Step 2 from the taxable income figured in Step 1. State nm us tax 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. State nm us tax 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in  Step 1. State nm us tax 6 Figure your actual section 179 expense deduction using the taxable income figured in Step 5. State nm us tax 7 Subtract your actual section 179 expense deduction figured in Step 6 from the taxable income figured in Step 1. State nm us tax 8 Figure your actual other deduction using the taxable income figured in Step 7. State nm us tax Example. State nm us tax On February 1, 2013, the XYZ farm corporation purchased and placed in service qualifying section 179 property that cost $500,000. State nm us tax It elects to expense the entire $500,000 cost under section 179. State nm us tax In June, the corporation gave a charitable contribution of $10,000. State nm us tax A corporation's limit on charitable contributions is figured after subtracting any section 179 expense deduction. State nm us tax The business income limit for the section 179 expense deduction is figured after subtracting any allowable charitable contributions. State nm us tax XYZ's taxable income figured without the section 179 expense deduction or the deduction for charitable contributions is $520,000. State nm us tax XYZ figures its section 179 expense deduction and its deduction for charitable contributions as follows. State nm us tax Step 1. State nm us tax Taxable income figured without either deduction is $520,000. State nm us tax Step 2. State nm us tax Using $520,000 as taxable income, XYZ's hypothetical section 179 expense deduction is $500,000. State nm us tax Step 3. State nm us tax $20,000 ($520,000 − $500,000). State nm us tax Step 4. State nm us tax Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. State nm us tax Step 5. State nm us tax $518,000 ($520,000 − $2,000). State nm us tax Step 6. State nm us tax Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 expense deduction. State nm us tax Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 expense deduction. State nm us tax Step 7. State nm us tax $20,000 ($520,000 − $500,000). State nm us tax Step 8. State nm us tax Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. State nm us tax Carryover of disallowed deduction. State nm us tax   You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. State nm us tax   The amount you carry over is used in determining your section 179 expense deduction in the next year. State nm us tax However, it is subject to the limits in that year. State nm us tax If you place more than one property in service in a year, you can select the properties for which all or a part of the cost will be carried forward. State nm us tax Your selections must be shown in your books and records. State nm us tax Example. State nm us tax Last year, Joyce Jones placed in service a machine that cost $8,000 and elected to deduct all $8,000 under section 179. State nm us tax The taxable income from her business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) was $6,000. State nm us tax Her section 179 expense deduction was limited to $6,000. State nm us tax The $2,000 cost that was not allowed as a section 179 expense deduction (because of the business income limit) is carried to this year. State nm us tax This year, Joyce placed another machine in service that cost $9,000. State nm us tax Her taxable income from business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) is $10,000. State nm us tax Joyce can deduct the full cost of the machine ($9,000) but only $1,000 of the carryover from last year because of the business income limit. State nm us tax She can carry over the balance of $1,000 to next year. State nm us tax Partnerships and S Corporations The section 179 expense deduction limits apply both to the partnership or S corporation and to each partner or shareholder. State nm us tax The partnership or S corporation determines its section 179 expense deduction subject to the limits. State nm us tax It then allocates the deduction among its partners or shareholders. State nm us tax If you are a partner in a partnership or shareholder of an S corporation, you add the amount allocated from the partnership or S corporation to any section 179 costs not related to the partnership or S corporation and then apply the dollar limit to this total. State nm us tax To determine any reduction in the dollar limit for costs over $560,000, you do not include any of the cost of section 179 property placed in service by the partnership or S corporation. State nm us tax After you apply the dollar limit, you apply the business income limit to any remaining section 179 costs. State nm us tax For more information, see chapter 2 of Publication 946. State nm us tax Example. State nm us tax In 2013, Partnership P placed in service section 179 property with a total cost of $2,160,000. State nm us tax P must reduce its dollar limit by $160,000 ($2,160,000 − $2,000,000). State nm us tax Its maximum section 179 expense deduction is $340,000 ($500,000 − $160,000), and it elects to expense that amount. State nm us tax Because P's taxable income from the active conduct of all its trades or businesses for the year was $400,000, it can deduct the full $340,000. State nm us tax P allocates $100,000 of its section 179 expense deduction and $110,000 of its taxable income to John, one of its partners. State nm us tax John also conducts a business as a sole proprietor and in 2013, placed in service in that business, section 179 property costing $28,000. State nm us tax John's taxable income from that business was $10,000. State nm us tax In addition to the $100,000 allocated from P, he elects to expense the $28,000 of his sole proprietorship's section 179 costs. State nm us tax However, John's deduction is limited to his business taxable income of $120,000 ($110,000 from P plus $10,000 from his sole proprietorship). State nm us tax He carries over $8,000 ($128,000 − $120,000) of the elected section 179 costs to 2014. State nm us tax How Do You Elect the Deduction? You elect to take the section 179 expense deduction by completing Part I of Form 4562. State nm us tax If you elect the deduction for listed property, complete Part V of  Form 4562 before completing Part I. State nm us tax   File Form 4562 with either of the following: Your original tax return (whether or not you filed it timely), or An amended return filed within the time prescribed by law. State nm us tax An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. State nm us tax The amended return must also include any resulting adjustments to taxable income. State nm us tax Revoking an election. State nm us tax   An election (or any specification made in the election) to take a section 179 expense deduction for 2013 can be revoked without IRS approval by filing an amended return. State nm us tax The amended return must be filed within the time prescribed by law. State nm us tax The amended return must also include any resulting adjustments to taxable income (for example, allowable depreciation in that tax year for the item of section 179 property for which the election pertains. State nm us tax ) Once made, the revocation is irrevocable. State nm us tax When Must You Recapture the Deduction? You may have to recapture the section 179 expense deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. State nm us tax In the year the business use drops to 50% or less, you include the recapture amount as ordinary income. State nm us tax You also increase the basis of the property by the recapture amount. State nm us tax Recovery periods for property are discussed later. State nm us tax If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. State nm us tax Instead, use the rules for recapturing depreciation explained in  chapter 9 under Section 1245 Property. State nm us tax   If the property is listed property, do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. State nm us tax Instead, use the rules for recapturing depreciation explained in chapter 5 of Publication 946 under Recapture of Excess Depreciation. State nm us tax Figuring the recapture amount. State nm us tax   To figure the amount to recapture, take the following steps. State nm us tax Figure the allowable depreciation for the section 179 expense deduction you claimed. State nm us tax Begin with the year you placed the property in service and include the year of recapture. State nm us tax Subtract the depreciation figured in (1) from the section 179 expense deduction you actually claimed. State nm us tax The result is the amount you must recapture. State nm us tax Example. State nm us tax In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. State nm us tax The property is not listed property. State nm us tax He elected a $5,000 section 179 expense deduction for the property and also elected not to claim a special depreciation allowance. State nm us tax He used the property only for business in 2011 and 2012. State nm us tax During 2013, he used the property 40% for business and 60% for personal use. State nm us tax He figures his recapture amount as follows. State nm us tax Section 179 expense deduction claimed (2011) $5,000 Minus: Allowable depreciation (instead of section 179 expense deduction):   2011 $1,250   2012 1,875   2013 ($1,250 × 40% (business)) 500 3,625 2013 — Recapture amount $1,375     Paul must include $1,375 in income for 2013. State nm us tax Where to report recapture. State nm us tax   Report any recapture of the section 179 expense deduction as ordinary income in Part IV of Form 4797 and include it in income on Schedule F (Form 1040). State nm us tax Recapture for qualified section 179 GO Zone property. State nm us tax   If any qualified section 179 GO Zone property ceases to be used in the GO Zone in a later year, you must recapture the benefit of the increased section 179 expense deduction as “other income. State nm us tax ” Claiming the Special Depreciation Allowance For qualified property (defined below) placed in service in 2013, you can take an additional 50% special depreciation allowance. State nm us tax The allowance is an additional deduction you can take after any section 179 expense deduction and before you figure regular depreciation under MACRS. State nm us tax Figure the special depreciation allowance by multiplying the depreciable basis of the qualified property by 50%. State nm us tax What is Qualified Property? For farmers, qualified property generally is certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. State nm us tax Certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. State nm us tax   Certain qualified property (defined below) acquired after December 31, 2007, and before January 1, 2014, is eligible for a 50% special depreciation allowance. State nm us tax   Qualified property includes the following: Tangible property depreciated under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less. State nm us tax Water utility property. State nm us tax Off-the-shelf computer software. State nm us tax Qualified leasehold improvement property. State nm us tax   Qualified property must also meet all of the following tests: You must have acquired qualified property by purchase after December 31, 2007. State nm us tax If a binding contract to acquire the property existed before January 1, 2008, the property does not qualify. State nm us tax Qualified property must be placed in service after December 31, 2007 and placed in service before January 1, 2014 (before January 1, 2015 for certain property with a long production period and for certain aircraft). State nm us tax The original use of the property must begin with you after December 31, 2007. State nm us tax For more information, see chapter 3 of Publication 946. State nm us tax How Can You Elect Not To Claim the Allowance? You can elect, for any class of property, not to deduct the special depreciation allowance for all property in such class placed in service during the tax year. State nm us tax To make the election, attach a statement to your return indicating the class of property for which you are making the election. State nm us tax Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. State nm us tax However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). State nm us tax Attach the election statement to the amended return. State nm us tax On the amended return, write “Filed pursuant to section 301. State nm us tax 9100-2. State nm us tax ” Once made, the election may not be revoked without IRS consent. State nm us tax If you elect not to have the special depreciation allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation. State nm us tax When Must You Recapture an Allowance When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable. State nm us tax For more information, see chapter 3 of Publication 946. State nm us tax Figuring Depreciation Under MACRS The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. State nm us tax MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). State nm us tax Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. State nm us tax To be sure you can use MACRS to figure depreciation for your property, see Can You Use MACRS To Depreciate Your Property, earlier. State nm us tax This part explains how to determine which MACRS depreciation system applies to your property. State nm us tax It also discusses the following information that you need to know before you can figure depreciation under MACRS. State nm us tax Property's recovery class. State nm us tax Placed-in-service date. State nm us tax Basis for depreciation. State nm us tax Recovery period. State nm us tax Convention. State nm us tax Depreciation method. State nm us tax Finally, this part explains how to use this information to figure your depreciation deduction. State nm us tax Which Depreciation System (GDS or ADS) Applies? Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines what depreciation method and recovery period you use. State nm us tax You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. State nm us tax Required use of ADS. State nm us tax   You must use ADS for the following property. State nm us tax All property used predominantly in a farming business and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect. State nm us tax Listed property used 50% or less in a qualified business use. State nm us tax See Additional Rules for Listed Property , later. State nm us tax Any tax-exempt use property. State nm us tax Any tax-exempt bond-financed property. State nm us tax Any 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. State nm us tax Any tangible property used predominantly outside the United States during the year. State nm us tax If you are required to use ADS to depreciate your property, you cannot claim the special depreciation allowance. State nm us tax Electing ADS. State nm us tax   Although your property may qualify for GDS, you can elect to use ADS. State nm us tax The election generally must cover all property in the same property class you placed in service during the year. State nm us tax However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. State nm us tax Once you make this election, you can never revoke it. State nm us tax   You make the election by completing line 20 in Part III of Form 4562. State nm us tax Which Property Class Applies Under GDS? The following is a list of the nine property classes under GDS. State nm us tax 3-year property. State nm us tax 5-year property. State nm us tax 7-year property. State nm us tax 10-year property. State nm us tax 15-year property. State nm us tax 20-year property. State nm us tax 25-year property. State nm us tax Residential rental property. State nm us tax Nonresidential real property. State nm us tax See Which Property Class Applies Under GDS in chapter 4 of Publication 946 for examples of the types of property included in each class. State nm us tax What Is the Placed-in-Service Date? You begin to claim depreciation when your property is placed in service for use either in a trade or business or for the production of income. State nm us tax The placed-in-service date for your property is the date the property is ready and available for a specific use. State nm us tax It is therefore not necessarily the date it is first used. State nm us tax If you converted property held for personal use to use in a trade or business or for the production of income, treat the property as being placed in service on the conversion date. State nm us tax See Placed in Service under When Does Depreciation Begin and End , earlier, for examples illustrating when property is placed in service. State nm us tax What Is the Basis for Depreciation? The basis for depreciation of MACRS property is the property's cost or other basis multiplied by the percentage of business/investment use. State nm us tax Reduce that amount by any credits and deductions allocable to the property. State nm us tax The following are examples of some of the credits and deductions that reduce basis. State nm us tax Any deduction for section 179 property. State nm us tax Any deduction for removal of barriers to the disabled and the elderly. State nm us tax Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. State nm us tax Any special depreciation allowance. State nm us tax Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. State nm us tax For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property , earlier. State nm us tax Also, see chapter 6. State nm us tax For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. State nm us tax Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. State nm us tax It is determined based on the depreciation system (GDS or ADS) used. State nm us tax See Table 7-1 for recovery periods under both GDS and ADS for some commonly used assets. State nm us tax For a complete list of recovery periods, see the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. State nm us tax House trailers for farm laborers. State nm us tax   To depreciate a house trailer you supply as housing for those who work on your farm, use one of the following recovery periods if the house trailer is mobile (it has wheels and a history of movement). State nm us tax A 7-year recovery period under GDS. State nm us tax A 10-year recovery period under ADS. State nm us tax   However, if the house trailer is not mobile (its wheels have been removed and permanent utilities and pipes attached to it), use one of the following recovery periods. State nm us tax A 20-year recovery period under GDS. State nm us tax A 25-year recovery period under ADS. State nm us tax Water wells. State nm us tax   Water wells used to provide water for raising poultry and livestock are land improvements. State nm us tax If they are depreciable, use one of the following recovery periods. State nm us tax A 15-year recovery period under GDS. State nm us tax A 20-year recovery period under ADS. State nm us tax   The types of water wells that can be depreciated were discussed earlier in Irrigation systems and water wells under Property Having a Determinable Useful Life . State nm us tax Table 7-1. State nm us tax Farm Property Recovery Periods   Recovery Period in Years Assets GDS ADS Agricultural structures (single purpose) 10 15 Automobiles 5 5 Calculators and copiers 5 6 Cattle (dairy or breeding) 5 7 Communication equipment1 7 10 Computer and peripheral equipment 5 5 Drainage facilities 15 20 Farm buildings2 20 25 Farm machinery and equipment 7 10 Fences (agricultural) 7 10 Goats and sheep (breeding) 5 5 Grain bin 7 10 Hogs (breeding) 3 3 Horses (age when placed in service)     Breeding and working (12 years or less) 7 10 Breeding and working (more than 12 years) 3 10 Racing horses 3 12 Horticultural structures (single purpose) 10 15 Logging machinery and equipment3 5 6 Nonresidential real property 394 40 Office furniture, fixtures, and equipment (not calculators, copiers, or typewriters) 7 10 Paved lots 15 20 Residential rental property 27. State nm us tax 5 40 Tractor units (over-the-road) 3 4 Trees or vines bearing fruit or nuts 10 20 Truck (heavy duty, unloaded weight 13,000 lbs. State nm us tax or more) 5 6 Truck (actual weight less than 13,000 lbs) 5 5 Water wells 15 20 1 Not including communication equipment listed in other classes. State nm us tax 2 Not including single purpose agricultural or horticultural structures. State nm us tax 3 Used by logging and sawmill operators for cutting of timber. State nm us tax 4 For property placed in service after May 12, 1993; for property placed in service before May 13, 1993,  the recovery period is 31. State nm us tax 5 years. State nm us tax Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. State nm us tax The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. State nm us tax Use one of the following conventions. State nm us tax The half-year convention. State nm us tax The mid-month convention. State nm us tax The mid-quarter convention. State nm us tax For a detailed explanation of each convention, see Which Convention Applies in chapter 4 of Publication 946. State nm us tax Also, see the Instructions for Form 4562. State nm us tax Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. State nm us tax The 200% declining balance method over a GDS recovery period. State nm us tax The 150% declining balance method over a GDS recovery period. State nm us tax The straight line method over a GDS recovery period. State nm us tax The straight line method over an ADS recovery period. State nm us tax Depreciation Table. State nm us tax   The following table lists the types of property you can depreciate under each method. State nm us tax The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. State nm us tax Depreciation Table System/Method   Type of Property GDS using  150% DB • All property used in a farming business (except real property)   • All 15- and 20-year property   • Nonfarm 3-, 5-, 7-, and 10-year property1 GDS using SL • Nonresidential real property   • Residential rental property   • Trees or vines bearing fruit or nuts   • All 3-, 5-, 7-, 10-, 15-, and 20-year property1 ADS using SL • Property used predomi- nantly outside the United States   • Farm property used when an election not to apply the uniform capitalization rules is in effect   • Tax-exempt property   • Tax-exempt bond-financed property   • Imported property2   • Any property for which you elect to use this method1 GDS using  200% DB • Nonfarm 3-, 5-, 7-, and 10-year property 1Elective method 2See section 168(g)(6) of the Internal Revenue  Code Property used in farming business. State nm us tax   For personal property placed in service after 1988 in a farming business, you must use the 150% declining balance method over a GDS recovery period or you can elect one of the following methods. State nm us tax The straight line method over a GDS recovery period. State nm us tax The straight line method over an ADS recovery period. State nm us tax For property placed in service before 1999, you could have elected to use the 150% declining balance method using the ADS recovery periods for certain property classes. State nm us tax If you made this election, continue to use the same method and recovery period for that property. State nm us tax Real property. State nm us tax   You can depreciate real property using the straight line method under either GDS or ADS. State nm us tax Switching to straight line. State nm us tax   If you use a declining balance method, you switch to the straight line method in the year it provides an equal or greater deduction. State nm us tax If you use the MACRS percentage tables, discussed later under How Is the Depreciation Deduction Figured , you do not need to determine in which year your deduction is greater using the straight line method. State nm us tax The tables have the switch to the straight line method built into their rates. State nm us tax Fruit or nut trees and vines. State nm us tax   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a 10-year recovery period. State nm us tax ADS required for some farmers. State nm us tax   If you elect not to apply the uniform capitalization rules to any plant shown in Table 6-1 of chapter 6 and produced in your farming business, you must use ADS for all property you place in service in any year the election is in effect. State nm us tax See chapter 6 for a discussion of the application of the uniform capitalization rules to farm property. State nm us tax Electing a different method. State nm us tax   As shown in the Depreciation Table , you can elect a different method for depreciation for certain types of property. State nm us tax You must make the election by the due date of the return (including extensions) for the year you placed the property in service. State nm us tax However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). State nm us tax Attach the election to the amended return and write “Filed pursuant to section 301. State nm us tax 9100-2” on the election statement. State nm us tax File the amended return at the same address you filed the original return. State nm us tax Once you make the election, you cannot change it. State nm us tax    If you elect to use a different method for one item in a property class, you must apply the same method to all property in that class placed in service during the year of the election. State nm us tax However, you can make the election on a property-by-property basis for residential rental and nonresidential real property. State nm us tax Straight line election. State nm us tax   Instead of using the declining balance method, you can elect to use the straight line method over the GDS recovery period. State nm us tax Make the election by entering “S/L” under column (f) in Part III of Form 4562. State nm us tax ADS election. State nm us tax   As explained earlier under Which Depreciation System (GDS or ADS) Applies , you can elect to use ADS even though your property may come under GDS. State nm us tax ADS uses the straight line method of depreciation over the ADS recovery periods, which are generally longer than the GDS recovery periods. State nm us tax The ADS recovery periods for many assets used in the business of farming are listed in Table 7–1. State nm us tax Additional ADS recovery periods for other classes of property may be found in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. State nm us tax How Is the Depreciation Deduction Figured? To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed-in-service date, basis amount, recovery period, convention, and depreciation method that applies to your property. State nm us tax Then you are ready to figure your depreciation deduction. State nm us tax You can figure it in one of two ways. State nm us tax You can use the percentage tables provided by the IRS. State nm us tax You can figure your own deduction without using the tables. State nm us tax Figuring your own MACRS deduction will generally result in a slightly different amount than using the tables. State nm us tax Using the MACRS Percentage Tables To help you figure your deduction under MACRS, the IRS has established percentage tables that incorporate the applicable convention and depreciation method. State nm us tax These percentage tables are in Appendix A of Publication 946. State nm us tax Rules for using the tables. State nm us tax   The following rules cover the use of the percentage tables. State nm us tax You must apply the rates in the percentage tables to your property's unadjusted basis. State nm us tax Unadjusted basis is the same basis amount you would use to figure gain on a sale but figured without reducing your original basis by any MACRS depreciation taken in earlier years. State nm us tax You cannot use the percentage tables for a short tax year. State nm us tax See chapter 4 of Publication 946 for information on how to figure the deduction for a short tax year. State nm us tax You generally must continue to use them for the entire recovery period of the property. State nm us tax You must stop using the tables if you adjust the basis of the property for any reason other than— Depreciation allowed or allowable, or An addition or improvement to the property, which is depreciated as a separate property. State nm us tax Basis adjustment due to casualty loss. State nm us tax   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. State nm us tax For the year of the adjustment and the remaining recovery period, you must figure the depreciation yourself using the property's adjusted basis at the end of the year. State nm us tax See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. State nm us tax Figuring depreciation using the 150% DB method and half-year convention. State nm us tax    Table 7-2 has the percentages for 3-, 5-, 7-, and 20-year property. State nm us tax The percentages are based on the 150% declining balance method with a change to the straight line method. State nm us tax This table covers only the half-year convention and the first 8 years for 20-year property. State nm us tax See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. State nm us tax   The following examples show how to figure depreciation under MACRS using the percentages in Table 7-2 . State nm us tax Example 1. State nm us tax During the year, you bought an item of 7-year property for $10,000 and placed it in service. State nm us tax You do not elect a section 179 expense deduction for this property. State nm us tax In addition, the property is not qualified property for purposes of the special depreciation allowance. State nm us tax The unadjusted basis of the property is $10,000. State nm us tax You use the percentages in Table 7-2 to figure your deduction. State nm us tax Since this is 7-year property, you multiply $10,000 by 10. State nm us tax 71% to get this year's depreciation of $1,071. State nm us tax For next year, your depreciation will be $1,913 ($10,000 × 19. State nm us tax 13%). State nm us tax Example 2. State nm us tax You had a barn constructed on your farm at a cost of $20,000. State nm us tax You placed the barn in service this year. State nm us tax You elect not to claim the special depreciation allowance. State nm us tax The barn is 20-year property and you use the table percentages to figure your deduction. State nm us tax You figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 3. State nm us tax 75% to get $750. State nm us tax For next year, your depreciation will be $1,443. State nm us tax 80 ($20,000 × 7. State nm us tax 219%). State nm us tax Table 7-2. State nm us tax 150% Declining Balance Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 25. State nm us tax 0 % 15. State nm us tax 00 % 10. State nm us tax 71 % 3. State nm us tax 750 % 2 37. State nm us tax 5   25. State nm us tax 50   19. State nm us tax 13   7. State nm us tax 219   3 25. State nm us tax 0   17. State nm us tax 85   15. State nm us tax 03   6. State nm us tax 677   4 12. State nm us tax 5   16. State nm us tax 66   12. State nm us tax 25   6. State nm us tax 177   5     16. State nm us tax 66   12. State nm us tax 25   5. State nm us tax 713   6     8. State nm us tax 33   12. State nm us tax 25   5. State nm us tax 285   7         12. State nm us tax 25   4. State nm us tax 888   8         6. State nm us tax 13   4. State nm us tax 522   Figuring depreciation using the straight line method and half-year convention. State nm us tax   The following table has the straight line percentages for 3-, 5-, 7-, and 20-year property using the half-year convention. State nm us tax The table covers only the first 8 years for 20-year property. State nm us tax See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. State nm us tax Table 7-3. State nm us tax Straight Line Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 16. State nm us tax 67 % 10 % 7. State nm us tax 14 % 2. State nm us tax 5 % 2 33. State nm us tax 33   20   14. State nm us tax 29   5. State nm us tax 0   3 33. State nm us tax 33   20   14. State nm us tax 29   5. State nm us tax 0   4 16. State nm us tax 67   20   14. State nm us tax 28   5. State nm us tax 0   5     20   14. State nm us tax 29   5. State nm us tax 0   6     10   14. State nm us tax 28   5. State nm us tax 0   7         14. State nm us tax 29   5. State nm us tax 0   8         7. State nm us tax 14   5. State nm us tax 0    
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