2 Page 1 of 99 of Publication 946 12:00 - 20-DEC-2001 2 ...

1 Userid: _____Leading adjust: -40% Draft Ok to PrintPAGER/ ( 20-DEC-2001 )(Init. & date)Page 1 of 99 of Publication 94612:00 - 20-DEC-2001 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before of the TreasuryContentsInternal Revenue ServiceImportant 946 Cat. No. Overview of Property Can Be Depreciated?..3 How ToWhen Does Depreciation Begin and End?..6 Can You Use MACRS To Depreciate YourProperty?..7 DepreciateWhat Is the Basis of Your DepreciableProperty?..10 How Do You Treat Improvements?..11 PropertyDo You Have To File Form 4562?..11 How Do You Correct DepreciationDeductions?..12 Section 179 Deduction2. Electing the Section 179 MACRSWhat Property Qualifies?..14 Listed PropertyHow Much Can You Deduct?..16 How Do You Elect the Deduction?..19 When Must You Recapture the Deduction?..20 For use in preparing3.

2 Figuring Depreciation Under Depreciation System (GDS or ADS)Applies?..212001 ReturnsWhich Property Class Applies UnderGDS?..21 What Is the Placed-in-Service Date?..23 What Is the Basis for Depreciation?..23 Which Recovery Period Applies?..23 Which Convention Applies?..25 Which Depreciation Method Applies?..25 How Is the Depreciation DeductionFigured?..27 How Do You Use General AssetAccounts?..36 When Do You Recapture MACRSD epreciation?..404. Additional Rules for Listed Is Listed Property?..41 Does the Limit for Employees Apply?..42Do the Business-Use Limits Apply?..43Do the Passenger Automobile Limits Apply?..47 What Records Must Be Kept?..49 How Is Listed Property InformationReported?..515. Comprehensive How To Get Tax A MACRS Percentage B Table of Class Lives andRecovery 2 of 99 of Publication 94612:00 - 20-DEC-2001 The type and rule above prints on all proofs including departmental reproduction proofs.

3 MUST be removed before informationSee Publication :on depreciating:Important ChangesA car463, Travel, Entertainment, Gift, andIncrease in the section 179 maximumCar Expensessection 179 deduction you can elect for property youResidential rentalplaced in service during 2001 has increased to $24, , Residential Rental PropertypropertyThis amount will continue to increase through 2003. SeeDollar Limit under How Much Can You Deduct? in chapterOffice space in587, Business Use of Your Homeyour property225, Farmer s Tax GuideElection not to apply the mid-quarter conventionunder you file your 2001 return on a calendaryear basis, on a fiscal year basis, or for a short tax year andComments and welcome your com-the third or fourth quarter of your tax year includes Septem-ments about this Publication and your suggestions forber 11, 2001, you can elect to apply the half-year conven-future to all property placed in service during the year thatYou can e-mail us while visiting our web site atwould otherwise be subject to the mid-quarter MACRS.

4 See Which Convention Applies? and Us-You can write to us at the following address:ing the Applicable Convention in a Short Tax Year inchapter Revenue ServiceTechnical Publications BranchW:CAR:MP:FP:PImportant Reminder1111 Constitution Ave. NWWashington, DC 20224 Photographs of missing Internal Reve-nue Service is a proud partner with the National Center forWe respond to many letters by telephone. Therefore, itMissing and Exploited Children. Photographs of missingwould be helpful if you would include your daytime phonechildren selected by the Center may appear in this publica-number, including the area code, in your on pages that would otherwise be blank. You can helpbring these children home by looking at the photographsand calling 1 800 THE LOST (1 800 843 5678) ifyou recognize a Publication explains how you can recover the cost ofOverview ofbusiness or income-producing property through deduc-tions for depreciation.

5 It also explains how you can elect toDepreciationtake a section 179 deduction, instead of depreciation de-ductions, for certain property and the additional rules for listed property. In addition, the Publication describes howIntroductionto figure depreciation and how to fill out Form 4562, Depre-Depreciation is an annual income tax deduction that allowsciation and to recover the cost or other basis of certain propertyThe depreciation methods discussed in this publi-over the time you use the property. It is an allowance forcation do not generally apply to property placed inthe wear and tear, age, deterioration, or obsolescence ofservice before 1987. If you want informationCAUTION!the depreciating such property, see Publication chapter discusses the general rules for depreciat-ing property. It explains what property can be depreciated,when depreciation begins and ends, whether MACRS of the terms used in this Publication arebe used to figure depreciation, what the basis for deprecia-defined in the Glossary near the end of the is, and how to treat improvements.

6 It also explainsDo you need a different Publication ?The following ta-whether you have to file Form 4562 and how you canble shows where you can get more detailed informationcorrect depreciation claimed incorrectly in a previous depreciating certain types of ItemsYou may want to see: Publication 534 Depreciating Property Placed in ServiceBefore 1987 535 Business ExpensesPage 2 Chapter 1 Overview of DepreciationPage 3 of 99 of Publication 94612:00 - 20-DEC-2001 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing. 538 Accounting Periods and MethodsThe following discussions provide information about theserequirements. 551 Basis of AssetsForm (and Instructions)Property You Own Sch C (Form 1040)Profit or Loss From BusinessTo claim depreciation, you usually must be the owner of Sch C-EZ (Form 1040)Net Profit From Businessthe property.

7 You are considered as owning property evenif it is subject to a debt. 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee BusinessExample made a down payment on rental prop-Expenseserty and assumed the previous owner s mortgage. Youown the property and you can depreciate it. 3115 Application for Change in Accounting Method 4562 Depreciation and AmortizationExample bought a new van that you will use onlyfor your courier business. You will be making payments onSee chapter 6 for information about getting publicationsthe van over the next 5 years. You own the van and youand depreciate can depreciate leased propertyWhat Property Can Beonly if you retain the incidents of ownership for the prop-erty. This means you bear the burden of exhaustion of theDepreciated?capital investment in the property. Therefore, if you leaseproperty from someone to use in your trade or business orTerms you may need to knowfor the production of income, you generally cannot depreci-(see Glossary):ate its cost because you do not retain the incidents ofownership.

8 You can, however, depreciate any capital im-Adjusted basisprovements you make to the property. See How Do YouTreat Improvements? later in this chapter and AdditionsAmortizationand Improvements under Which Recovery Period Applies?Basisin chapter you lease property to someone, you generally canCommutingdepreciate its cost even if the lessee (the person leasingDispositionfrom you) has agreed to preserve, replace, renew, andmaintain the property. However, if the lease provides thatFair market valuethe lessee is to maintain the property and return to you theGoodwillsame property or its equivalent in value at the expiration ofthe lease in as good condition and value as when leased,Intangible propertyyou cannot depreciate the cost of the propertyIncidents of of ownership forPlaced in serviceproperty include the interest The legal property The legal obligation to pay for interest The responsibility to pay its maintenance and oper-ating life The duty to pay any can depreciate most types of tangible property (except The risk of loss if the property is destroyed, con-land), such as buildings, machinery, vehicles, furniture,demned, or diminished in value through obsoles-and equipment.

9 You can also depreciate certain intangiblecence or , such as patents, copyrights, and , if you hold business or investmentTo be depreciable, the property must meet all the follow-property as a life tenant, you can depreciate it as if youing the absolute owner of the property. However, seeCertain term interests in property under Excepted Prop- It must be property you , later. It must be used in your business or income-produc-ing you are a tenant-stockholderin a cooperative housing corporation and use your cooper- It must have a determinable useful apartment in your business or for the production of It must be expected to last more than one , you can deduct depreciation for the apartment It must not be excepted though it is owned by the corporation. Your deprecia-Chapter 1 Overview of DepreciationPage 3 Page 4 of 99 of Publication 94612:00 - 20-DEC-2001 The type and rule above prints on all proofs including departmental reproduction proofs.

10 MUST be removed before deduction is your share of the corporation s deprecia-Property Used in Your Business ActivityFigure your depreciation deduction as claim depreciation on property, you must use it in your1) Figure the depreciation for all the depreciable realbusiness or income-producing activity. If you use propertyproperty owned by the corporation. If you boughtto produce income (investment use), the income must beyour cooperative stock after its first offering, figuretaxable. You cannot depreciate property that you usethe depreciable basis of this property as for personal ) Multiply your cost per share by the total numberPartial business or investment you use propertyof outstanding business or investment purposes and for personalb) Add to the amount figured in (a) any mortgagepurposes, you can deduct depreciation based only on thedebt on the property on the date you bought thebusiness or investment use.