Previous Page: Publication 225 - Farmer's Tax Guide - Claiming the Special Depreciation Allowance Next Page: Publication 225 - Farmer's Tax Guide - Additional Rules for Listed Property Use   to find additional instances of index items.

Taxmap/pubs/p225-032.htm#TXMP39e539c0 Figuring Depreciation Under MACRS

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. MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions.

To be sure you can use MACRS to figure depreciation for your property, see Can You Use MACRS To Depreciate Your Property, earlier.

This part explains how to determine which MACRS depreciation system applies to your property. It also discusses the following information that you need to know before you can figure depreciation under MACRS.

• Property's recovery class.
• Placed-in-service date.
• Basis for depreciation.
• Recovery period.
• Convention.
• Depreciation method.

Finally, this part explains how to use this information to figure your depreciation deduction.

Taxmap/pubs/p225-032.htm#TXMP2ada6221 Which Depreciation System (GDS or ADS) Applies?

Depreciation, System

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. You should use GDS unless you are specifically required by law to use ADS or you elect to use ADS.

Taxmap/pubs/p225-032.htm#TXMP28b17532 Required use of ADS.

You must use ADS for the following property.

• 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.
• Listed property used 50% or less in a qualified business use. For information on listed property, see Additional Rules for Listed Property, later.
• Any tax-exempt use property.
• Any tax-exempt bond-financed property.
• 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.
• Any tangible property used predominantly outside the United States during the year.

If you are required to use ADS to depreciate your property, you cannot claim the special depreciation allowance (discussed earlier).

Taxmap/pubs/p225-032.htm#TXMP2067cd64 Electing ADS.

Although your property may qualify for GDS, you can elect to use ADS. The election generally must cover all property in the same property class you placed in service during the year. However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Once you make this election, you can never revoke it.

You make the election by completing line 20 in Part III of Form 4562.

Taxmap/pubs/p225-032.htm#TXMP6ca7369c Which Property Class Applies Under GDS?

Depreciation

The following is a list of the nine property classes under GDS.

1. 3-year property.
2. 5-year property.
3. 7-year property.
4. 10-year property.
5. 15-year property.
6. 20-year property.
7. 25-year property.
8. Residential rental property.
9. Nonresidential real property.

See Which Property Class Applies Under GDS in chapter 4 of Publication 946 for examples of the types of property included in each class.

Taxmap/pubs/p225-032.htm#TXMP52df7abc What Is the Placed-in-Service Date?

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. The placed-in-service date for your property is the date the property is ready and available for a specific use. It is therefore not necessarily the date it is first used. 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. See Placed in Service under When Does Depreciation Begin and End, earlier, for examples illustrating when property is placed in service.

Taxmap/pubs/p225-032.htm#TXMP6c3e7858 What Is the Basis for Depreciation?

Depreciation, Basis

The basis for depreciation of MACRS property is the property's cost or other basis multiplied by the percentage of business/investment use. Reduce that amount by the following items.

• Any deduction for section 179 property.
• Any deduction for removal of barriers to the disabled and the elderly.
• Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services.
• Any special depreciation allowance.
• Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code.

For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property, earlier.

Taxmap/pubs/p225-032.htm#TXMP1c9ffcb7 Which Recovery Period Applies?

Depreciation

The recovery period of property is the number of years over which you recover its cost or other basis. It is determined based on the depreciation system (GDS or ADS) used.

Taxmap/pubs/p225-032.htm#TXMP0ae1b9f5 Recovery periods.

See Table 7-1 for recovery periods under both GDS and ADS for some commonly used assets. For a complete list of recovery periods, see the Table of Class Lives and Recovery Periods in Appendix B of Publication 946.

Taxmap/pubs/p225-032.htm#TXMP0bdd8aec House trailers for farm laborers.

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).

• A 7-year recovery period under GDS.
• A 10-year recovery period under ADS.

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.

• A 20-year recovery period under GDS.
• A 25-year recovery period under ADS.

Taxmap/pubs/p225-032.htm#TXMP7e1d5328 Water wells.

Water wells used to provide water for raising poultry and livestock are land improvements. If they are depreciable, use one of the following recovery periods.

• A 15-year recovery period under GDS.
• A 20-year recovery period under ADS.

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.

Taxmap/pubs/p225-032.htm#TXMP4c041b5a Which Convention Applies?

Depreciation

Under MACRS, averaging conventions establish when the recovery period begins and ends. 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. Use one of the following conventions.

• The half-year convention.
• The mid-month convention.
• The mid-quarter convention.

Taxmap/pubs/p225-032.htm#TXMP201fea3c The mid-month convention.

Use this convention for all nonresidential real property and residential rental property.

Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of.

Taxmap/pubs/p225-032.htm#TXMP05c0693c The mid-quarter convention.

Use this convention if the mid-month convention does not apply and the total depreciable bases of MACRS property you placed in service during the last 3 months of the tax year (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) are more than 40% of the total depreciable bases of all MACRS property you placed in service during the year.

Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter. This means that 11/2 months of depreciation is allowed for the quarter the property is placed in service or disposed of.

For purposes of determining whether the mid-quarter convention applies, the depreciable basis of property you placed in service during the tax year does not reflect any reduction in basis for the special depreciation allowance.

Taxmap/pubs/p225-032.htm#TXMP2451a3ad The half-year convention.

Use this convention if neither the mid-quarter convention nor the mid-month convention applies.

Under this convention, you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of the year. This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of.

Taxmap/pubs/p225-032.htm#TXMP12375c8f Which Depreciation Method Applies?

Depreciation, Method

MACRS provides three depreciation methods under GDS and one depreciation method under ADS.

• The 200% declining balance method over a GDS recovery period.
• The 150% declining balance method over a GDS recovery period.
• The straight line method over a GDS recovery period.
• The straight line method over an ADS recovery period.

Taxmap/pubs/p225-032.htm#TXMP7ce42f8f Property used in farming business.

For personal property placed in service in a farming business after 1988 you must use the 150% declining balance method over a GDS recovery period or you can elect one of the following methods.

• The straight line method over a GDS recovery period.
• The straight line method over an ADS recovery period.

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. If you made this election, continue to use the same method and recovery period for that property.

Taxmap/pubs/p225-032.htm#TXMP22cdb88a Real property.

You can depreciate real property using the straight line method under either GDS or ADS.

Taxmap/pubs/p225-032.htm#TXMP696271e0 Depreciation Table.

The following table lists the types of property you can depreciate under each method. The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL.

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 property 1
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 property 1
ADS using SL	·	Property used predomi-nantly outside the U.S.
	·	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 property 2
	·	Any property for which you elect to use this method 1
GDS using 200% DB	·	Nonfarm 3-, 5-, 7-, and 10-year property

1Elective method

2See section 168(g)(6) of the Internal Revenue  Code

Taxmap/pubs/p225-032.htm#TXMP112480c0 Switching to straight line.

If you use a declining balance method, you switch to the straight line method in the year it provides an equal or greater deduction. 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. The tables have the switch to the straight line method built into their rates.

Taxmap/pubs/p225-032.htm#TXMP44ba07f8 Fruit or nut trees and vines.

Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a 10-year recovery period.

Taxmap/pubs/p225-032.htm#TXMP4717f553 ADS required for some farmers.

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. See chapter 6 for a discussion of the application of the uniform capitalization rules to farm property.

Taxmap/pubs/p225-032.htm#TXMP30abd116 Farming business.

A farming business is any trade or business involving cultivating land or raising or harvesting any agricultural or horticultural commodity. A farming business includes the following.

• Operating a nursery or sod farm.
• Raising or harvesting crops.
• Raising or harvesting trees bearing fruit, nuts, or other crops.
• Raising ornamental trees. (An evergreen tree is not considered an ornamental tree if it is more than 6 years old when it is severed from its roots.)
• Raising, shearing, feeding, caring for, training, and managing animals.

Taxmap/pubs/p225-032.htm#TXMP33e977af Processing activities.

In general, a farming business includes processing activities that are normally part of the growing, raising, or harvesting of agricultural products. However, a farming business generally does not include the processing of commodities or products beyond those activities that are normally part of the growing, raising, or harvesting of such products.

Taxmap/pubs/p225-032.htm#TXMP6537caf4
Example 1.

If you are in the trade or business of growing fruits and vegetables, you can harvest, wash, inspect, and package the fruits and vegetables for sale. Such activities are normally part of the raising of these crops by farmers. You are considered to be in the business of farming with respect to the growing of fruits and vegetables and the processing activities that are part of their harvest.

Taxmap/pubs/p225-032.htm#TXMP22db238e
Example 2.

You are in the business of growing and harvesting apples. You also process the apples you have harvested in order to produce applesauce and apple cider. You then sell these products to customers in the course of your business. Although you are in the farming business with respect to the growing and harvesting of apples, you are not in the farming business with respect to the processing of the apples to produce the food products.

Taxmap/pubs/p225-032.htm#TXMP5559dbf0 Electing a different method.

As shown in the Depreciation Table, you can elect a different method for depreciation for certain types of property. You must make the election by the due date of the return (including extensions) for the year you placed the property in service. 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). Attach the election to the amended return and write "Filed pursuant to section 301.9100-2" on the election statement. File the amended return at the same address you filed the original return. Once you make the election, you cannot change it.

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. However, you can make the election on a property-by-property basis for residential rental and nonresidential real property.

Taxmap/pubs/p225-032.htm#TXMP70bc9987 Straight line election.

Instead of using the declining balance method, you can elect to use the straight line method over the GDS recovery period. Make the election by entering "S/L" under column (f) in Part III of Form 4562.

Taxmap/pubs/p225-032.htm#TXMP28668929 ADS election.

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. ADS uses the straight line method of depreciation over the ADS recovery periods, which are generally longer than the GDS recovery periods. The ADS recovery periods for many assets used in the business of farming are listed in Table 7-1. 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.

Make the election by completing line 20 in Part III of Form 4562.

Taxmap/pubs/p225-032.htm#TXMP4a033e7d How Is the Depreciation Deduction Figured?

Depreciation

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. Then you are ready to figure your depreciation deduction. You can figure it in one of two ways.

• You can use the percentage tables provided by the IRS.
• You can figure your own deduction without using the tables.

Figuring your own MACRS deduction will generally result in a slightly different amount than using the tables.

Taxmap/pubs/p225-032.htm#TXMP7251f2a4 Using the MACRS Percentage Tables

MACRS

To help you figure your deduction under MACRS, the IRS has established percentage tables that incorporate the applicable convention and depreciation method. These percentage tables are in Appendix A of Publication 946.

Taxmap/pubs/p225-032.htm#TXMP767aa660 Rules for using the tables.

The following rules cover the use of the percentage tables.

1. You must apply the rates in the percentage tables to your property's unadjusted basis (defined later).
2. You cannot use the percentage tables for a short tax year. See chapter 4 of Publication 946 for information on how to figure the deduction for a short tax year.
3. You generally must continue to use them for the entire recovery period of the property.
4. You must stop using the tables if you adjust the basis of the property for any reason other than—
   1. Depreciation allowed or allowable, or
   2. An addition or improvement to the property. (An addition or improvement is depreciated as a separate property.)

Taxmap/pubs/p225-032.htm#TXMP69531dbd Basis adjustment due to casualty loss.

If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. 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. See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946.

Taxmap/pubs/p225-032.htm#TXMP065917b5 Figuring the unadjusted basis of your property.

You must apply the table rates to your property's unadjusted basis each year of the recovery period. 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. However, you do reduce your original basis by the following amounts.

• Any amortization taken on the property.
• Any section 179 deduction claimed on the property.
• Any special depreciation allowance.
• Any deduction claimed for a clean-fuel vehicle or clean-fuel vehicle refueling property.
• Any electric vehicle credit.

The clean-fuel vehicle and clean-fuel vehicle refueling property deductions and the credit for electric vehicles are discussed in chapter 12 of Publication 535.

For business property you purchase during the year, the unadjusted basis is its cost minus these adjustments. If you trade property, your unadjusted basis in the property received is the cash paid plus the adjusted basis of the property traded minus these adjustments.

Taxmap/pubs/p225-032.htm#TXMP17200358 Figuring depreciation using the 150% DB method and half-year convention.

Table 7-2 has the percentages for 3-, 5-, 7-, and 20-year property. The percentages are based on the 150% declining balance method with a change to the straight line method. This table covers only the half-year convention and the first 8 years for 20-year property. See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention.

The following examples show how to figure depreciation under MACRS using the percentages in Table 7-2.

Taxmap/pubs/p225-032.htm#TXMP18bd13ed
Example 1.

During the year, you bought an item of 7-year property for $10,000 and placed it in service. You do not elect a section 179 deduction for this property and elect not to claim the special depreciation allowance. The unadjusted basis of the property is $10,000. You use the percentages in Table 7-2 to figure your deduction.

Since this is 7-year property, you multiply $10,000 by 10.71% to get this year's depreciation of $1,071. For next year, your depreciation will be $1,913 ($10,000 × 19.13%).

Taxmap/pubs/p225-032.htm#TXMP16dde6a7
Example 2.

You had a barn constructed on your farm at a cost of $20,000. You placed the barn in service this year. You elect not to claim the special depreciation allowance. The barn is 20-year property and you use the table percentages to figure your deduction. You figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 3.75% to get $750. For next year, your depreciation will be $1,443.80 ($20,000 × 7.219%).

Taxmap/pubs/p225-032.htm#TXMP6d30b3ac Figuring depreciation using the straight line method and half-year convention.

The following table has the straight line percentages for 3-, 5-, 7-, and 20-year property using the half-year convention. The table covers only the first 8 years for 20-year property. See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention.

Straight Line Percentages

Year	3-Year		5-Year		7-Year		20-Year
1	16.67	%	10	%	7.14	%	2.5	%
2	33.33		20		14.29		5.0
3	33.33		20		14.29		5.0
4	16.67		20		14.28		5.0
5			20		14.29		5.0
6			10		14.28		5.0
7					14.29		5.0
8					7.14		5.0

The following example shows how to figure depreciation under MACRS using the straight line percentages in the table.

Taxmap/pubs/p225-032.htm#TXMP5e83d3d4
Example.

If in Example 2, earlier, you had elected the straight line method, you figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 2.5% to get $500. For next year, your depreciation will be $1,000 ($20,000 × 5%).

Taxmap/pubs/p225-032.htm#TXMP0afea9ea Figuring Depreciation Without the Tables

Depreciation Figured Without the Tables

If you are required to or would prefer to figure your own depreciation without using the tables, see Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946.

Taxmap/pubs/p225-032.htm#TXMP6d25a796 Figuring the Deduction for Property Acquired in A Nontaxable Exchange

Figuring the Deduction for Property Acquired in A Nontaxable Exchange

If your property has a carryover basis because you acquired it in an exchange or involuntary conversion of other property or in a nontaxable transfer, you generally figure depreciation for the property as if the exchange, conversion, or transfer had not occurred. However, see Like-kind exchanges and involuntary conversions, earlier, under Claiming the Special Depreciation Allowance.

Taxmap/pubs/p225-032.htm#TXMP22ac852c Property acquired in a like-kind exchange or involuntary conversion.

You generally must depreciate the carryover basis of MACRS property acquired in a like-kind exchange or involuntary conversion over the remaining recovery period of the property exchanged or involuntarily converted. You also generally continue to use the same depreciation method and convention used for the exchanged or involuntarily converted property. The excess basis, if any, of the acquired MACRS property is treated as newly placed in service MACRS property. This applies only to acquired property with the same or a shorter recovery period or the same or more accelerated depreciation method than the property exchanged or converted.

For transactions after February 27, 2004, you can elect not to use the above rules. The election, if made, applies to both the acquired property and the exchanged or involuntarily converted property. If you make the election, figure depreciation by treating the carryover basis and excess basis, if any, for the acquired property as if placed in service on the date you acquired it. For depreciation purposes the adjusted basis of the exchanged property is treated as if it was disposed of at the time of the exchange or conversion.

Taxmap/pubs/p225-032.htm#TXMP51921541 When to make the election.

You must make the election on a timely filed return (including extensions) for the year of replacement. Once made, the election may not be revoked without IRS consent.

For more information and special rules, see chapter 4 of Publication 946 and the Instructions for Form 4562.

Taxmap/pubs/p225-032.htm#TXMP2809555c Property acquired in a nontaxable transfer.

You must depreciate MACRS property acquired by a corporation or partnership in certain nontaxable transfers over the property's remaining recovery period in the transferor's hands, as if the transfer had not occurred. You must continue to use the same depreciation method and convention as the transferor. You can depreciate the part of the property's basis in excess of its carried-over basis (the transferor's adjusted basis in the property) as newly purchased MACRS property. For information on the kinds of nontaxable transfers covered by this rule, see chapter 4 of Publication 946.

Taxmap/pubs/p225-032.htm#TXMP2c5db045 How Do You Use General Asset Accounts?

Depreciation

To make it easier to figure MACRS depreciation, you can group separate properties into one or more general asset accounts (GAAs). You can then depreciate all the properties in each account as a single item of property. Each account can include only property with the same asset class (if any), recovery period, depreciation method, and convention. You cannot include property if you use it in both a personal activity and a trade or business (or for the production of income) in the year in which you first place it in service.

After you have set up a GAA, you generally figure the depreciation for it by using the applicable depreciation method, recovery period, and convention for the property in the GAA. For each GAA, record the depreciation allowance in a separate depreciation reserve account.

There are additional rules for grouping property in a GAA, figuring depreciation for a GAA, disposing of GAA property, and terminating GAA treatment. Special rules apply in determining the basis and figuring the depreciation deduction for MACRS property in a GAA acquired in a like-kind exchange or involuntary conversion. See chapter 4 in Publication 946.

Taxmap/pubs/p225-032.htm#TXMP4efd3559 When Do You Recapture   MACRS Depreciation?

Depreciation, Recapture

When you dispose of property you depreciated using MACRS, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the depreciation previously allowed or allowable for the property. Depreciation, for this purpose, includes any section 179 deduction claimed on the property, any special depreciation allowance available for the property (unless you elected not to claim it), and any deduction claimed for clean-fuel vehicles and clean-fuel vehicle refueling property. There is no recapture for residential rental and nonresidential real property, unless that property is qualified property for which you claimed a special depreciation allowance (discussed earlier). For more information on depreciation recapture, see chapter 9.

Previous Page:  Publication 225 - Farmer's Tax Guide - Claiming the Special Depreciation Allowance Next Page:  Publication 225 - Farmer's Tax Guide - Additional Rules for Listed Property Use     to find additional instances of index items.