1116 Publ 534 (PDF)

Official source: IRS Forms, Instructions & Publications (https://www.irs.gov/pub/irs-pdf/p534.pdf), retrieved 2026-10-03. U.S. Government work (17 U.S.C. § 105).

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Department of the Treasury

Internal Revenue Service

Oct 20, 2016

Publication 534 (Rev. November 2016)

Cat. No. 15064O

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Introduction . . . . . . . . . . . . . . . . . . 1

Chapter 1. Accelerated Cost

Recovery System (ACRS) . . . . . . 2 ACRS Defined . . . . . . . . . . . . . . 2 What Can and Cannot Be

Depreciated Under ACRS . . . . . . 2 How To Figure the Deduction . . . . . . 3 Dispositions . . . . . . . . . . . . . . . . 6

Chapter 2. Other Methods of

Depreciation . . . . . . . . . . . . . . 7 How To Figure the Deduction . . . . . . 7 Methods To Use . . . . . . . . . . . . . 8 How To Change Methods . . . . . . . . 8 Dispositions . . . . . . . . . . . . . . . . 9

Chapter 3. Listed Property . . . . . . . . 9 Listed Property Defined . . . . . . . . 10 Predominant Use Test . . . . . . . . . 10 Deductions After Recovery

Period . . . . . . . . . . . . . . . . 12 Leased Property . . . . . . . . . . . . 12 What Records Must Be Kept . . . . . 12

How To Get Tax Help . . . . . . . . . . . 13

Appendix . . . . . . . . . . . . . . . . . . . 15

Index . . . . . . . . . . . . . . . . . . . . . 21

The law allows you to recover your cost in busi­ ness or income­producing property through yearly tax deductions. You do this by depreciat­ ing your property, that is, by deducting some of your cost on your tax return each year. You can depreciate both tangible property, such as a car, building, or machinery, and certain intangi­ ble property, such as a copyright or a patent.

The amount you can deduct depends on:

1. How much the property cost,

2. When you began using it,

3. How long it will take to recover your cost, and

4. Which of several depreciation methods you use.

Depreciation defined. Depreciation is a loss in the value of property over the time the prop­ erty is being used. Events that can cause prop­ erty to depreciate include wear and tear, age, deterioration, and obsolescence. You can get back your cost of certain property, such as equipment you use in your business or property used for the production of income by taking de­ ductions for depreciation.

Amortization. Amortization is similar to depre­ ciation. Using amortization, you can recover your cost or basis in certain property proportion­ ately over a specific number of years or months. Examples of costs you can amortize are the costs of starting a business, reforestation, and

pollution control facilities. You can find informa­ tion on amortization in chapter 8 of Pub. 535, Business Expenses.

Alternative minimum tax. If you use acceler­ ated depreciation for real property, or personal property that is leased to others, you may be lia­ ble for the alternative minimum tax. Accelerated depreciation is any method that allows recovery at a faster rate in the earlier years than the straight line method. For more information, you may wish to see the following.

Form 6251, Alternative Minimum Tax—In­ dividuals. Pub. 542, Corporations.

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Tax questions. If you have a tax question not answered by this publication, check IRS.gov and How To Get Tax Help at the end of this publication.

This publication describes the kinds of property that can be depreciated and the methods used to figure depreciation on property placed in service before 1987. It is divided into three chapters and contains an appendix.

Chapter 1 explains the rules for depreciat­ ing property under the Accelerated Cost Recovery System (ACRS).

Chapter 2 explains the rules for depreciat­ ing property first used before 1981.

Chapter 3 explains the rules for listed prop­ erty. Also, this chapter defines listed prop­ erty.

The appendix contains the ACRS Percent­ age Tables.

ACRS applies to property first used before 1987. It is the name given to tax rules for getting back (recovering) through depreciation deduc­ tions the cost of property used in a trade or business or to produce income. These rules are mandatory and generally apply to tangible prop­ erty placed in service after 1980 and before 1987. If you placed property in service during this period, you must continue to figure your de­ preciation under ACRS.

If you used listed property placed in service af­ ter June 18, 1984, less than 50% for business during the year, see Predominant Use Test in chapter 3. Listed property includes cars, other means of transportation, and certain comput­ ers.

Any additions or improvements placed in serv­ ice after 1986, including any components of a building (such as plumbing, wiring, storm win­ dows, etc.), are depreciated using MACRS, dis­ cussed in chapter 4 of Pub. 946. It does not matter that the underlying property is depreci­ ated under ACRS or one of the other methods.

ACRS consists of accelerated depreciation methods and an alternate ACRS method that could have been elected. The alternate ACRS method used a recovery percentage based on a

Topics This chapter discusses:

The definition of ACRS What can and cannot be depreciated under ACRS How to figure the deduction Dispositions

Useful Items You may want to see:

Publication

544

551

583

Sales and Other Dispositions of Assets

Basis of Assets

Starting a Business and Keeping Records

Form (and Instructions)

3115 Application for Change in

Accounting Method

4562

Depreciation and Amortization

modified straight line method. The law pre­ scribes fixed percentages to be used for each class of property.

Property depreciable under ACRS is called recovery property. The recovery class of property determines the recovery period. Gen­ erally, the class life of property places it in a 3­year, 5­year, 10­year, 15­year, 18­year, or 19­year recovery class.

Under ACRS, the prescribed percentages are used to recover the unadjusted basis of re­ covery property. To figure a depreciation de­ duction, you multiply the prescribed percentage for the recovery class by the unadjusted basis of the recovery property.

You must continue to figure your deprecia­ tion under ACRS for property placed in service after 1980 and before 1987. For property you placed in service after 1986, you must use MACRS, discussed in chapter 4 of Pub. 946.

ACRS applies to most depreciable tangible property placed in service after 1980 and before 1987. It includes new or used and real or per­ sonal property. The property must be for use in a trade or business or for the production of in­ come. Property you acquired before 1981 or af­ ter 1986 is not ACRS recovery property. For in­ formation on depreciating property acquired before 1981, see chapter 2. For information on depreciating property acquired after 1986, see chapter 4 of Pub. 946.

Recovery Property

Recovery property under ACRS is tangible de­ preciable property placed in service after 1980 and before 1987. It generally includes new or used property that you acquired after 1980 and before 1987 for use in your trade or business or for the production of income.

Nonrecovery Property

You cannot use ACRS for property you placed in service before 1981 or after 1986. Nonrecov­ ery property also includes:

1. Intangible property,

2. Property you elected to exclude from ACRS that is properly depreciated under a method of depreciation that is not based on a term of years,

3. Certain public utility property, and

4. Certain property acquired and excluded from ACRS because of the antichurning rules.

Intangible property. Intangible property is not depreciated under ACRS.

Property depreciated under methods not expressed in a term of years. Certain prop­ erty depreciated under a method not expressed

Page 2 Chapter 1 Accelerated Cost Recovery System (ACRS)

The ACRS percentages for 10­year recov­ ery property are:

Recovery Period Percentage

1st year . . . . . . . . . . . . . . . . . . . 8% 2nd year . . . . . . . . . . . . . . . . . . . 14% 3rd year . . . . . . . . . . . . . . . . . . . 12% 4th through 6th year . . . . . . . . . . . 10% 7th through 10th year . . . . . . . . . . 9%

If you used the percentages above, you can­ not claim depreciation for this property after 1995.

Example. On April 21, 1986, you bought and placed in service a new mobile home for $26,000 to be used as rental property. You paid $10,000 cash and signed a note for $16,000 giving you an unadjusted basis of $26,000. On June 8, 1986, you bought and placed in service a used mobile home for use as rental property at a total cost of $11,500. The total unadjusted basis of your 10­year recovery property placed in service in 1986 was $37,500 ($26,000 + $11,500). Your ACRS deduction was $3,000 (8% × $37,500). In 1987, your ACRS deduction was $5,250 (14% × $37,500). In 1988, your ACRS deduction was $4,500 (12% × $37,500). In 1989, 1990, and 1991, your ACRS deduction was $3,750 (10% × $37,500). In 1992, 1993, 1994, and 1995 your deduction for each year is $3,375 (9% × $37,500).

15­Year Real Property

15­year real property is real property that is re­ covery property placed in service before March 16, 1984. It includes all real property, such as buildings, other than that designated as 5­year or 10­year property.

Unlike the 3­, 5­, or 10­year classes of prop­ erty, the percentages for 15­year real property depend on when you placed the property in service during your tax year. You could group 15­year real property by month and year placed in service.

In Table 1, at the end of this publication in the Appendix, find the month in your tax year that you placed the property in service in your trade or business or for the production of in­ come. You use the percentages listed under that month for each year of the recovery period to determine your depreciation deduction each year.

Example. On March 5, 1984, you placed an apartment building in service in your busi­ ness. It is 15­year real property. After subtract­ ing the value of the land, your unadjusted basis in the building is $250,000. You use the calen­ dar year as your tax year. March is the third month of your tax year. Your ACRS deduction for 1984 was $25,000 (10% × $250,000). For 1985, the percentage for the third month of the second year of the recovery period is 11%. Your deduction was $27,500 (11% × $250,000). For the third, fourth, and fifth years of the recov­ ery period (1986, 1987, and 1988), the percen­ tages are 9%, 8%, and 7%. For 1989 through 1992, the percentage for the third month is 6%. Your deduction each year is $15,000 (6% ×

in a term of years is not depreciated under ACRS. This included any property:

1. If you made an irrevocable election to ex­ clude such property; and

2. In the first year that you could have claimed depreciation, you properly used the unit­of­production method or any method of depreciation not expressed in a term of years (not including the retire­ ment­replacement­betterment method).

Public utility property. Public utility property for which the taxpayer does not use a normali­ zation method of accounting is excluded from ACRS and is subject to depreciation under a special rule.

Additions or improvements to ACRS prop­ erty after 1986. Any additions or improve­ ments placed in service after 1986, including any components of a building (plumbing, wiring, storm windows, etc.) are depreciated using MACRS, discussed in chapter 4 of Pub. 946. It does not matter that the underlying property is depreciated under ACRS or one of the other methods.

After you determine that your property can be depreciated under ACRS, you are ready to fig­ ure your deduction. Because the conventions are built into the percentage table rates, you only need to know the following.

1. The unadjusted basis of your recovery property.

2. The classes of recovery property.

3. The recovery periods.

4. Whether to use the prescribed percen­ tages based on accelerated methods or percentages based on using the alternate ACRS method.

Unadjusted Basis

To figure your ACRS deduction, you multiply the unadjusted basis in your recovery property by its applicable percentage for the year. Unad­ justed basis is the same amount you would use to figure gain on a sale, but it is figured without taking into account any depreciation taken in earlier years. However, reduce your original ba­ sis by the amount of amortization taken on the property and by any section 179 deduction claimed as discussed in chapter 2 of Pub. 946.

If you buy property, your unadjusted basis is usually its cost minus any amortized amount and minus any section 179 deduction elected. If you acquire property in some other way, such as by inheriting it, getting it as a gift, or building it yourself, you figure your unadjusted basis un­ der other rules. See Pub. 551.

Classes of Recovery Property

All recovery property under ACRS is in one of the following classes. The class for your prop­ erty was determined when you began to depre­ ciate it.

3­Year Property

3­year property includes automobiles, light­duty trucks (actual unloaded weight less than 13,000 pounds), and tractor units for use over­the­road. Race horses over 2 years old when placed in service are 3­year property. Any other horses over 12 years old when you placed them in service are also included in the 3­year property class.

The ACRS percentages for 3­year recovery property are:

Recovery Period Percentage

1st year . . . . . . . . . . . . . . . . . . . 25% 2nd year . . . . . . . . . . . . . . . . . . . 38% 3rd year . . . . . . . . . . . . . . . . . . . 37%

If you used the percentages above to depre­ ciate your 3­year recovery property, your prop­ erty, except for certain passenger automobiles, is fully depreciated. You cannot claim deprecia­ tion for this property after 1988.

5­Year Property

5­year property includes computers, copiers, and equipment, such as office furniture and fix­ tures. It also includes single purpose agricul­ tural or horticultural structures and petroleum storage facilities (other than buildings and their structural components).

The ACRS percentages for 5­year recovery property are:

Recovery Period Percentage

1st year . . . . . . . . . . . . . . . . . . . 15% 2nd year . . . . . . . . . . . . . . . . . . . 22% 3rd through 5th year . . . . . . . . . . . 21%

If you used the percentages above to depre­ ciate your 5­year recovery property, it is fully depreciated. You cannot claim depreciation for this property after 1990.

10­Year Property

10­year property includes certain real property such as theme­park structures and certain pub­ lic utility property. Manufactured homes (includ­ ing mobile homes) and railroad tank cars are also 10­year property.

You do not treat a building, and its structural components, as 10­year property by reason of a change in use after you placed the property in service. For example, a building (15­year real property) that was placed in service in 1981 and was converted to a theme­park structure in 1986 remains 15­year real property.

Chapter 1 Accelerated Cost Recovery System (ACRS) Page 3

$250,000). For 1993, 1994, and 1995, the per­ centage for the third month is 5%. Your depreci­ ation deduction is $12,500 (5% × $250,000) for 1993, 1994, and 1995.

Low­Income Housing

Low­income housing that was assigned a 15­year recovery period under ACRS includes the following types of property.

1. Federally assisted housing projects where the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by di­ rect loan or tax abatement under similar provisions of state or local laws.

2. Low­income rental housing for which a de­ preciation deduction for rehabilitation ex­ penditures is allowed.

3. Low­income rental housing held for occu­ pancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of state or local laws that authorize similar subsi­ dies for low­income families.

4. Housing financed or assisted by direct loan or insured under Title V of the Hous­ ing Act of 1949.

The ACRS percentages for low­income housing real property, like the regular 15­year real property percentages, depend on when you placed the property in service. In Table 2 or 3 at the end of this publication in the Appendix, find the month in your tax year that you first placed the property in service as rental housing. Use the percentages listed under that month for each year of the recovery period. Table 2 shows percentages for low­income housing placed in service before May 9, 1985. Table 3 shows percentages for low­income housing placed in service after May 8, 1985, and before 1987.

Example. In May 1986, you acquired and placed in service a house that qualified as low­income rental housing under item (3) of the above listing. You use the calendar year as your tax year. You use Table 3 because the property was placed in service after May 8, 1985. Your unadjusted basis for the property, not including the land, was $59,000.

Your deduction for 1986 through 2001 is shown in the following table.

Year Rate Deduction

1986 8.9% $5,251 1987 12.1% 7,139 1988 10.5% 6,195 1989 9.1% 5,369 1990 7.9% 4,661 1991 6.9% 4,071 1992 5.9% 3,481 1993 5.2% 3,068 1994 4.6% 2,714 1995 4.6% 2,714 1996 4.6% 2,714 1997 4.6% 2,714 1998 4.6% 2,714 1999 4.5% 2,655 2000 4.5% 2,655 2001 1.5% 885

18­Year Real Property

18­year real property is real property that is re­ covery property placed in service after March 15, 1984, and before May 9, 1985. It includes real property, such as buildings, other than that designated as 5­year, 10­year, 15­year real property, or low­income housing.

The ACRS percentages for 18­year real property depend on when you placed the prop­ erty in service in your trade or business or for the production of income during your tax year. There are also tables for 18­year real property in the Appendix. Table 4 shows the percen­ tages for 18­year real property you placed in service after June 22, 1984, and before May 9, 1985. Table 5 is for 18­year real property placed in service after March 15, 1984, and be­ fore June 23, 1984.

Find the month in your tax year that you placed the property in service in a trade or busi­ ness or for the production of income. Use the percentages listed under that month for each year of the recovery period.

Example. On April 28, 1985, you bought and placed in service a rental house. The house, not including the land, cost $95,000. This is your unadjusted basis for the house. You use the calendar year as your tax year. Be­ cause the house was placed in service after June 22, 1984, and before May 9, 1985, it is 18­year real property. You use Table 4 to figure your deduction for the house. April is the fourth month of your tax year. Your deduction for 1985 through 2003 is shown in the following table.

Year Rate Deduction

1985 7.0% $6,650 1986 9.0% 8,550 1987 8.0% 7,600 1988 7.0% 6,650 1989 7.0% 6,650 1990 6.0% 5,700 1991 5.0% 4,750 1992 5.0% 4,750 1993 5.0% 4,750 1994 5.0% 4,750 1995 5.0% 4,750 1996 5.0% 4,750 1997 5.0% 4,750 1998 4.0% 3,800 1999 4.0% 3,800 2000 4.0% 3,800 2001 4.0% 3,800 2002 4.0% 3,800 2003 1.0% 950

19­Year Real Property

19­year real property is real property that is re­ covery property placed in service after May 8, 1985, and before 1987. It includes all real prop­ erty, other than that designated as 5­year, 10­year, 15­year, or 18­year real property, or low­income housing.

The ACRS percentages for 19­year real property depend on when you placed the prop­ erty in service in a trade or business or for the production of income during your tax year. Ta­ ble 6 shows the percentages for 19­year real property.

You find the month in your tax year that you placed the property in service. You use the per­ centages listed under that month for each year of the recovery period.

Recovery Periods

Each item of recovery property is assigned to a class of property. The classes of recovery prop­ erty establish the recovery periods over which the unadjusted basis of items in a class is re­ covered. The classes of property are:

3­Year property,

5­Year property,

10­Year property,

15­Year real property,

Low­income housing,

18­Year real property, and

19­Year real property.

Alternate ACRS Method (Modified Straight Line Method)

ACRS provides an alternate ACRS method that could be elected. This alternate ACRS method uses a recovery percentage based on a modi­ fied straight line method.

Page 4 Chapter 1 Accelerated Cost Recovery System (ACRS)

This alternate ACRS method generally uses percentages other than those from the tables. If you elected the alternate ACRS method, you determine the recovery period by using the fol­ lowing schedule. This schedule is for other than 18­ and 19­year real property and low­income housing:

The saw is fully depreciated after 1998.

15­year real property. Under ACRS, you could also elect to use the alternate ACRS method for 15­year real property. The alternate ACRS method allows you to depreciate your 15­year real property using the straight line ACRS method over the alternate recovery peri­ ods of 15, 35, or 45 years. If you selected a 15­year recovery period, you use the percent­ age (6.667%) from the schedule above. You prorate this percentage for the number of months the property was in service in the first year. If you selected a 35­ or 45­year recovery period, you use either Table 11 or 15.

Alternate periods for 18­year real property. For 18­year real property, the alternate recovery periods are 18, 35, or 45 years. The percen­ tages for 18­year real property under the alter­ nate method are in Tables 7, 8, 10, 11, 14, and 15 in the Appendix. There are two tables for each alternate recovery period. One table shows the percentage for property placed in service after June 22, 1984. The other table has the percentages for property placed in service after March 15, 1984, and before June 23, 1984.

Alternate periods for 19­year real property. For 19­year real property, the alternate recovery periods are 19, 35, or 45 years. If you selected a 19­year recovery period, use Table 9 to deter­ mine your deduction. If you select a 35­ or 45­year recovery period, use either Table 13 or 14.

Example. You placed in service an apart­ ment building on August 3, 1986. The building is 19­year real property. The sales contract allo­ cated $300,000 to the building and $100,000 to the land. You use the calendar year as your tax year. You chose the alternate ACRS method over a recovery period of 35 years. For 1986, you figure your ACRS deduction using Ta­ ble 13. August is the eighth month of your tax year. The percentage from Table 13 for the eighth month is 1.1%. Your deduction was $3,300 ($300,000 × 1.1%). The deduction rate from ACRS Table 13 for years 2 through 20 is 2.9% so that your deduction in 1987 through 2005 is $8,700 ($300,000 × 2.9%).

Alternate periods for low­income housing. For low­income housing, the alternate recovery periods are 15, 35, or 45 years. If you selected a 15­year period for this property, use 6.667% as the percentage. If you selected a 35­ or 45­year period, use either Table 11, 12, or 15.

Election. You had to make the election to use the alternate ACRS method by the return due date (including extensions) for the tax year you placed the property in service.

Revocation of election. Your election to use an alternate ACRS method, once made, can be changed only with the consent of the Commis­ sioner. The Commissioner grants consent only in extraordinary circumstances. Any request for a revocation will be considered a request for a ruling.

In the case of:

You could have elected

a recovery period of:

3­year property . . . . . . . . . 3, 5, or 12 years 5­year property . . . . . . . . . 5, 12, or 25 years 10­year property . . . . . . . . 10, 25, or 35 years 15­year real property . . . . 15, 35, or 45 years

Percentages. The straight­line percentages for the alternate ACRS method are:

Recovery Period Percentage

5 years . . . . . . . . . . . . . . . . . . 20.00% 10 years . . . . . . . . . . . . . . . . . . 10.00% 12 years . . . . . . . . . . . . . . . . . . 8.333% 15 years . . . . . . . . . . . . . . . . . . 6.667% 25 years . . . . . . . . . . . . . . . . . . 4.00% 35 years . . . . . . . . . . . . . . . . . . 2.857%

You apply the percentage to the unadjusted basis (defined earlier) of the property to figure your ACRS deduction. There are tables for 18­ and 19­year real property later in this publica­ tion in the Appendix. For 15­year real property, see 15-year real property, later.

3­, 5­, and 10­year property. If you elected to use an alternate recovery percentage, you have to use the same recovery percentage for all property in that class that you placed in service in that tax year. This applies throughout the re­ covery period you selected.

Half-year convention. If you elected the alternate method, only a half­year of deprecia­ tion was deducted for the year you placed the property in service. This applied regardless of when in the tax year you placed the property in service. For each of the remaining years in the recovery period, you take a full year's deduc­ tion. If you hold the property for the entire recov­ ery period, a half­year of depreciation is allowa­ ble for the year following the end of the recovery period.

Example. You operate a small upholstery business. On March 19, 1986, you bought and placed in service a $13,000 light­duty panel truck to be used in your business and a $500 electric saw. You elected to use the alternate ACRS method. You did not elect to take a sec­ tion 179 deduction. You decided to recover the cost of the truck, which is 3­year recovery prop­ erty, over 5 years. The saw is 5­year property, but you decided to recover its cost over 12 years.

For 1986, your ACRS deduction reflected the half­year convention. In the first year, you deducted half of the amount determined for a full year. Your ACRS deduction for 1986 is as follows:

Light­duty truck

5 years straight line = 20% 20% × $13,000 = $2,600 Half­year convention ­ ¹ 2 of $2,600 = $1,300.00

Electric saw

12 years straight line = 8.333% 8.333% × $500 = $41.67 Half­year convention ­ ¹ 2 of $41.67 = 20.84

Total ACRS deduction for 1986 $1,320.84

You take a full year of depreciation for both the truck and the saw for the years 1987 through 1990. Your ACRS deduction for each of those years is as follows:

Light­duty truck

5 years straight line = 20% 20% × $13,000 = $2,600

Electric saw

12 years straight line = 8.333% 8.333% × $500 = $41.67

Total annual ACRS deduction for $2,641.67 1987 through 1990

In 1991, you take a half­year of depreciation for the truck and a full year of depreciation for the saw. Your ACRS deduction for 1991 is as follows:

Light­duty truck

5 years straight line = 20% 20% × $13,000 = $2,600 Half­year convention ­ ¹ 2 of $2,600 = $1,300.00

Electric saw

12 years straight line = 8.333% 8.333% × $500 = $41.67

Total ACRS deduction for 1991 $1,341.67

The truck is fully depreciated after 1991. You take a full year of depreciation for the saw for the years 1992 through 1997. Your ACRS deduction for each of those years is as follows:

Electric saw

12 years straight line = 8.333% 8.333% × $500 = $41.67

Total annual ACRS deduction for $41.67

1992 through 1997

You take a half­year of depreciation for the saw for 1998. Your ACRS deduction for 1998 is as follows:

Electric saw

12 years straight line = 8.333% 8.333% × $500 = 41.67

Half­year convention ­ ¹ 2 of $41.67 = 20.84

Total ACRS deduction for 1998 $20.84

Chapter 1 Accelerated Cost Recovery System (ACRS) Page 5

ACRS Deduction in Short Tax Year

For a tax year that is less than 12 months, the ACRS deduction is prorated on a 12­month ba­ sis. Figure the amount of the ACRS deduction for a short tax year as follows.

1. First, you figure the ACRS deduction for a full year. You figure this by multiplying the unadjusted basis by the recovery percent­ age.

2. You then multiply the ACRS deduction de­ termined for a full tax year by a fraction.

The numerator (top number) of the fraction is the number of months in the short tax year and the denominator (bottom number) is 12. For ex­ ample, a corporation placed in service in June 1986 an item of 3­year property with an unad­ justed basis of $10,000. The corporation files a tax return, because of a change in its account­ ing period, for the 6­month short tax year end­ ing June 30, 1986. The full year's ACRS deduc­ tion for this item is $2,500 ($10,000 × 25%), the first year percentage from the 3­year table. The ACRS deduction for the short tax year is $1,250 ($2,500 × 6/12).

You use the full ACRS percentages during the remaining years of the recovery period. For the first tax year after the recovery period, the unrecovered basis will be deductible.

Exception. For the tax year in which you placed 15­, 18­, or 19­year real property in serv­ ice or in the tax year you dispose of it, you com­ pute the ACRS deduction for the number of months that the property is in service during that tax year. You compute the number of months using either a full­month or mid­month convention. This is true regardless of the num­ ber of months in the tax year and the recovery period and method used.

A disposition is the permanent withdrawal of property from use in your trade or business or in the production of income. You can make a with­ drawal by sale, exchange, retirement, abandon­ ment, or destruction.

You generally recognize gain or loss on the disposition of an asset by sale. However, non­ recognition rules can allow you to postpone some gain. See Pub. 544.

If you physically abandon property, you can deduct as a loss the adjusted basis of the asset at the time of its abandonment. Your intent must be to discard the asset so that you will not use it again or retrieve it for sale, exchange, or other disposition.

Early dispositions. The disposal of an asset before the end of its specified recovery period is referred to as an early disposition. When an early disposition occurs, the depreciation de­ duction in the year of disposition depends on the class of property involved.

Early dispositions of ACRS property other than 15-, 18-, or 19-year real property.

Generally, you get no ACRS deduction for the tax year in which you dispose of or retire recov­ ery property, except for 15­, 18­, and 19­year real property. This means there is no deprecia­ tion deduction under ACRS in the year you dis­ pose of or retire any of your 3­, 5­, or 10­year recovery property.

Dispositions — mass asset accounts. The law provides a special rule to avoid the cal­ culation of gain on the disposition of assets from mass asset accounts. A mass asset ac­ count includes items usually minor in value in relation to the group, numerous in quantity, im­ practical to separately identify, and not usually accounted for on a separate basis, but on a to­ tal dollar value. Examples of mass assets in­ clude minor items of office, plant, and store fur­ niture and fixtures.

Under the special rule, if you elected to use a mass asset account, you recognize gain to the extent of the proceeds from the disposition of the asset. You leave the unadjusted basis of the property in the account until recovered in fu­ ture years. If you did this, include the total pro­ ceeds realized from the disposition in income on the tax return for the year of disposition.

Early dispositions — 15-year real prop- erty. If you dispose of 15­year real property, you base your ACRS deduction for the year of disposition on the number of months in use. You use a full-month convention. For a dispo­ sition at any time during a particular month be­ fore the end of the recovery period, no deduc­ tion is allowed for the month of disposition. This applies whether you use the regular ACRS method or elected the alternate ACRS method.

Example. You purchased and placed in service a rental house on March 2, 1984, for $98,000 (not including the cost of land). You file your return based on a calendar year. Your rate from Table 1 for the third month is 10%. Your ACRS deduction for 1984 was $9,800 ($98,000 × 10%). For 1985 through 1988, you figured your ACRS deductions using 11%, 9%, 8%, and 7% × $98,000. For 1989 through 1992, you figured your ACRS deductions using 6% for each year. The deduction each year was $98,000 × 6%. For 1993 and 1994, the ACRS deduction is ($98,000 × 5%) $4,900 for each year. You sell the house on June 1, 1995.

You figure your ACRS deduction for 1995 for the full year and then prorate that amount for the months of use. The full ACRS deduction for 1995 is $4,900 ($98,000 × 5%). You then pro­ rate this amount to the 5 months in 1995 during which it was rented. Your ACRS deduction for 1995 is $2,042 ($4,900 × 5/12).

Early dispositions — 18- and 19-year real property. If you dispose of 18­ or 19­year real property, you base your ACRS deduction for the year of disposition on the number of months in use. For 18­year property placed in service before June 23, 1984, use a full­month convention on a disposition. For 18­year prop­ erty placed in service after June 22, 1984, and for 19­year property, determine the number of months in use by using the mid­month conven­ tion. Under the mid-month convention, treat real property disposed of any time during a month as disposed of in the middle of that

month. Count the month of disposition as half a month of use.

Example. You purchased and placed in service a rental house on July 2, 1984, for $100,000 (not including the cost of land). You file your return based on a calendar year. Your rate from Table 4 for the seventh month is 4%. You figured your ACRS deduction for 1984 was $4,000 ($100,000 × 4%). In 1985 through 1994, your ACRS deductions were 9%, 8%, 8%, 7%, 6%, 6%, 5%, 5%, and 5% × $100,000. You sell the house on September 24, 1995. Figure your ACRS deduction for 1995 for the months of use. The full ACRS deduction for 1995 is $5,000 ($100,000 × 5%). Prorate this amount for the 8.5 months in 1995 that you held the property. Under the mid­month convention, you count September as half a month. Your ACRS deduc­ tion for 1995 is $3,542 ($5,000 × 8.5/12).

Depreciation Recapture

If you dispose of property depreciated under ACRS that is section 1245 recovery property, you will generally recognize gain or loss. Gain recognized on a disposition is ordinary income to the extent of prior depreciation deductions taken. This recapture rule applies to all personal property in the 3­year, 5­year, and 10­year classes. You recapture gain on manufactured homes and theme park structures in the 10­year class as section 1245 property. Section 1245 property generally includes all personal prop­ erty. See Section 1245 property in chapter 3 of Pub. 544 for more information.

You treat dispositions of section 1250 real property on which you have a gain as section 1245 recovery property. You recognize gain on this property as ordinary income to the extent of prior depreciation deductions taken. Section 1250 property includes most real property. See Section 1250 property in chapter 3 of Pub. 544 for more information. This rule applies to all section 1250 real property except the following property.

1. Any 15­, 18­, or 19­year real property that is residential rental property.

2. Any 15­, 18­, or 19­year real property that you elected to depreciate using the alter­ nate ACRS method.

3. Any 15­, 18­, or 19­year real property that is subsidized low­income housing.

For these recapture rules, you treat the section 179 deduction and 50% of the investment credit that reduced your basis as depreciation.

See Pub. 544 for further discussion of dispo­ sitions of section 1245 and 1250 property.

Page 6 Chapter 1 Accelerated Cost Recovery System (ACRS)

Pub. 551 explains how to figure basis for property acquired in different ways. It also dis­ cusses what items increase and decrease ba­ sis, how to figure adjusted basis, and how to al­ locate cost if you buy several pieces of property at one time.

Useful Life

The useful life of a piece of property is an esti­ mate of how long you can expect to use it in your trade or business, or to produce income. It is the length of time over which you will make yearly depreciation deductions of your basis in the property. It is how long it will continue to be useful to you, not how long the property will last.

Many things affect the useful life of property, such as:

1. Frequency of use,

2. Age when acquired,

3. Your repair policy, and

4. Environmental conditions.

The useful life can also be affected by tech­ nological improvements, progress in the arts, reasonably foreseeable economic changes, shifting of business centers, prohibitory laws, and other causes. Consider all these factors be­ fore you arrive at a useful life for your property.

The useful life of the same type of property varies from user to user. When you determine the useful life of your property, keep in mind your own experience with similar property. You can use the general experience of the industry you are in until you are able to determine a use­ ful life of your property from your own experi­ ence.

Change in useful life. You base your estimate of useful life on certain facts. If these facts change significantly, you can adjust your esti­ mate of the remaining useful life. However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change.

Salvage Value

It is important for you to accurately determine the correct salvage value of the property you want to depreciate. You generally cannot de­ preciate property below a reasonable salvage value.

Determining salvage value. Salvage value is the estimated value of property at the end of its useful life. It is what you expect to get for the property if you sell it after you can no longer use it productively. You must estimate the salvage value of a piece of property when you first ac­ quire it.

Salvage value is affected both by how you use the property and how long you use it. If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. However, if your policy is to use property until it is no longer usable, its sal­ vage value can be its junk value.

Topics This chapter discusses:

How to figure the deduction Methods to use How to change methods Dispositions

Useful Items You may want to see:

Publication

544

551

583

946

Sales and Other Dispositions of Assets

Basis of Assets

Starting a Business and Keeping Records

How To Depreciate Property

Form (and Instructions)

3115 Application for Change in

Accounting Method

4562

Depreciation and Amortization

Schedule C (Form 1040) Profit or Loss

From Business

If your property is being depreciated under ACRS, you must continue to use rules for de­ preciation that applied when you placed the property in service. If your property qualified for MACRS, you must depreciate it under MACRS. See Pub. 946.

However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. Also, you can elect to exclude certain property from being depreciated under MACRS. Property that you cannot depreciate using MACRS includes:

1. Intangible property,

2. Property you can elect to exclude from MACRS that you properly depreciate un­ der a method that is not based on a term of years,

3. Certain public utility property,

4. Any motion picture film or video tape,

5. Any sound recording, and

6. Certain real and personal property placed in service before 1987.

Intangible property. You cannot depreciate intangible property under ACRS or MACRS. You depreciate intangible property using any other reasonable method, usually, the straight line method.

Note. The cost of certain intangible prop­ erty that you acquire after August 10, 1993, must be amortized over a 15­year period. For more information, see chapter 8 of Pub. 535.

Public utility property. The law excludes from MACRS any public utility property for which the taxpayer does not use a normaliza­ tion method of accounting. This type of property is subject to depreciation under a special rule.

Videocassettes. If you are in the videocas­ sette rental business, you can depreciate those videocassettes purchased for rental. You can depreciate the cost less salvage value of those videocassettes that have a useful life over one year using either:

The straight line method, or The income forecast method.

The straight line method, salvage value, and useful life are discussed later under Methods To Use. You can deduct in the year of purchase as a business expense the cost of any cassette that has a useful life of one year or less.

Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. These methods are straight line and declining balance.

To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. They are:

1. The basis,

2. The useful life, and

3. The estimated salvage value at the end of its useful life.

The amount of the deduction in any year also depends on which method of depreciation you choose.

Basis

To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. Your original basis is usually the pur­ chase price. However, if you acquire property in some other way, such as inheriting it, getting it as a gift, or building it yourself, you have to fig­ ure your original basis in a different way.

Adjusted basis. Events will often change the basis of property. When this occurs, the changed basis is called the adjusted basis. Some events, such as improvements you make, increase basis. Events such as deduct­ ing casualty losses and depreciation decrease basis. If basis is adjusted, the depreciation de­ duction may also have to be changed, depend­ ing on the reason for the adjustment and the method of depreciation you are using.

Chapter 2 Other Methods of Depreciation Page 7

Changing salvage value. Once you deter­ mine the salvage value for property, you should not change it merely because prices have changed. However, if you redetermine the use­ ful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. When you redetermine the salvage value, take into account the facts that exist at the time.

Net salvage. Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. You can choose either salvage value or net salvage when you figure depreciation. You must consistently use the one you choose and the treatment of the costs of re­ moval must be consistent with the practice adopted. However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. Your salvage value can never be less than zero.

10% rule. If you acquire personal property that has a useful life of 3 years or more, you can use an amount for salvage value that is less than your actual estimate. You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation.

Two methods of depreciation are the straight line and declining balance methods. If ACRS or MACRS does not apply, you can use one of these methods. The straight line and declining balance methods discussed in this section are not figured in the same way as straight line or declining balance methods under MACRS.

Straight Line Method

Before 1981, you could use any reasonable method for every kind of depreciable property. One of these methods was the straight line method. This method was also used for intangi­ ble property. It lets you deduct the same amount of depreciation each year.

To figure your deduction, determine the ad­ justed basis of your property, its salvage value, and its estimated useful life. Subtract the sal­ vage value, if any, from the adjusted basis. The balance is the total amount of depreciation you can take over the useful life of the property.

Divide the balance by the number of years remaining in the useful life. This gives you the amount of your yearly depreciation deduction. Unless there is a big change in adjusted basis, or useful life, this amount will stay the same throughout the time you depreciate the prop­ erty. If, in the first year, you use the property for less than a full year, you must prorate your de­ preciation deduction for the number of months in use.

Example. In April 1994, Frank bought a franchise for $5,600. It expires in 10 years. This property is intangible property that cannot be depreciated under MACRS. Frank depreciates the franchise under the straight line method,

using a 10­year useful life and no salvage value. He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). He must prorate the $560 for his 9 months of use in 1994. This gives him a de­ duction of $420 ($560 × 9/12). In 1995, Frank can deduct $560 for the full year.

Declining Balance Method

The declining balance method allows you to re­ cover a larger amount of the cost of the property in the early years of your use of the property. The rate cannot be more than twice the straight line rate.

Rate of depreciation. Under this method, you must determine your declining balance rate of depreciation. The initial step is to:

1. Divide the number 1 by the useful life of your property to get a straight line rate. (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ¹⁵, or 20%.)

2. Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate.

Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change.

Depreciation deductions. After you deter­ mine the rate of depreciation, multiply the ad­ justed basis of the property by it. This gives you the amount of your deduction. For example, if your adjusted basis at the beginning of the first year is $10,000, and your declining balance rate is 20%, your depreciation deduction for the first year is $2,000 ($10,000 × 20%). To figure your depreciation deduction in the second year, you must first adjust the basis for the amount of depreciation you deducted in the first year. Sub­ tract the previous year's depreciation from your basis ($10,000 − $2,000 = $8,000). Multiply this amount by the rate of depreciation ($8,000 × 20% = $1,600). Your depreciation deduction for the second year is $1,600.

As you can see from this example, your ad­ justed basis in the property gets smaller each year. Also, under this method, deductions are larger in the earlier years and smaller in the later years. You can make a change to the straight line method without consent.

Salvage value. Do not subtract salvage value when you figure your yearly depreciation de­ ductions under the declining balance method. However, you cannot depreciate the property below its reasonable salvage value. Determine salvage value using the rules discussed earlier, including the special 10% rule.

Example. If your adjusted basis has been decreased to $1,000 and the rate of deprecia­ tion is 20%, your depreciation deduction should be $200. But if your estimate of salvage value was $900, you can only deduct $100. This is because $100 is the amount that would lower your adjusted basis to equal salvage value.

Income Forecast Method

The income forecast method requires income projections for each videocassette or group of videocassettes. You can group the videocas­ settes by title for making this projection. You de­ termine the depreciation by applying a fraction to the cost less salvage value of the cassette. The numerator is the income from the videocas­ sette for the tax year and the denominator is the total projected income for the cassette. For more information on the income forecast method, see Revenue Ruling 60­358 in Cumu­ lative Bulletin 1960, Volume 2, on page 68.

In some cases, you may change your method of depreciation for property depreciated under a reasonable method. If you change your method of depreciation, it is generally a change in your method of accounting. You must get IRS con­ sent before making the change. However, you do not need permission for certain changes in your method of depreciation. The rules dis­ cussed in this section do not apply to property depreciated under ACRS or MACRS.

For information on ACRS elections, see Revocation of election in chapter 1 under Alter- nate ACRS Method .

Change to the straight line method. You can change from the declining balance method to the straight line method at any time during the useful life of your property without IRS consent. However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. When the change is made, figure depreciation based on your adjusted ba­ sis in the property at that time. Your adjusted basis takes into account all previous deprecia­ tion deductions. Use the estimated remaining useful life of your property at the time of change and its estimated salvage value.

You can change from the declining balance method to straight line only on the original tax return for the year you first use the straight line method. You cannot make the change on an amended return filed after the due date of the original return (including extensions).

When you make the change, attach a state­ ment to your tax return showing:

1. When you acquired the property,

2. Its original cost or other original basis,

3. The total amount claimed for depreciation and other allowances since you acquired it,

4. Its salvage value and remaining useful life, and

5. A description of the property and its use.

After you change to straight line, you cannot change back to the declining balance method or to any other method for a period of 10 years without written permission from the IRS.

Changes that require permission. For most other changes in method of depreciation, you

Page 8 Chapter 2 Other Methods of Depreciation

must get permission from the IRS. To request a change in method of depreciation, file Form 3115. File the application within the first 180 days of the tax year the change is to become ef­ fective. See the Instructions for Form 3115 for more information.

Changes granted automatically. The IRS automatically approves certain changes of a method of depreciation. But, you must file Form 3115 for these automatic changes. However, the IRS can deny permission if Form 3115 is not filed on time. For more infor­ mation on automatic changes, see the Instruc­ tions for Form 3115.

Changes for which approval is not auto­ matic. The automatic change procedures do not apply to:

1. Property or an account where you made a change in depreciation within the last 10 tax years (unless the change was made under the Class Life System),

2. Class Life Asset Depreciation Range Sys­ tem, and

3. Public utility property.

You must request and receive permission for these changes. To make the request, file Form 3115 during the first 180 days of the tax year for which you want the change to be effec­ tive.

Change from an improper method. If the IRS disallows the method you are using, you do not need permission to change to a proper method. You can adopt the straight line method, or any other method that would have been permitted if you had used it from the be­ ginning. If you file your tax return using an im­ proper method, but later file an amended return, you can use a proper method on the amended return without getting IRS permission. However, you must file the amended return before the fil­ ing date for the next tax year.

Retirement is the permanent withdrawal of de­ preciable property from use in your trade or business or for the production of income. You can do this by selling, exchanging, or abandon­ ing the item of property. You can also withdraw it from use without disposing of it. For example, you could place it in a supplies or scrap ac­ count. Retirements can be either normal or ab­ normal depending on all facts and circumstan­ ces. The rules discussed next do not apply to MACRS and ACRS property.

Normal retirement. A normal retirement is a permanent withdrawal of depreciable property from use if the following apply.

1. The retirement is made within the useful life you estimated originally.

2. The property has reached a condition at which you customarily retire or would retire similar property from use.

A retirement is generally considered normal un­ less you can show that you retired the property

because of a reason you did not consider when you originally estimated the useful life of the property.

Abnormal retirement. A retirement can be ab­ normal if you withdraw the property early or un­ der other circumstances. For example, if the property is damaged by a fire or suddenly be­ comes obsolete and is now useless.

Gain or loss on retirement. There are special rules for figuring the gain or loss on retirement of property. The gain or loss will depend on sev­ eral factors. These include the type of with­ drawal, if the withdrawal was from a single property or multiple property account, and if the retirement was normal or abnormal. A single property account contains only one item of property. A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the en­ tire account.

Sale or exchange. If property is retired by sale or exchange, you figure gain or loss by the usual rules that apply to sales or other disposi­ tions of property. See Pub. 544.

Property not disposed of or abandoned. If property is retired permanently, but not dis­ posed of or physically abandoned, you do not recognize gain. You are allowed a loss in such a case, but only if the retirement is:

1. An abnormal retirement,

2. A normal retirement from a single property account in which you determined the life of each item of property separately, or

3. A normal retirement from a multiple prop­ erty account in which the depreciation rate is based on the maximum expected life of the longest lived item of property and the loss occurs before the expiration of the full useful life. However, you are not allowed a loss if the depreciation rate is based on the average useful life of the items of prop­ erty in the account.

To figure your loss, subtract the estimated salvage or fair market value of the property at the date of retirement, whichever is more, from its adjusted basis.

Special rule for normal retirements from item accounts. You can generally deduct los­ ses upon retirement of a few depreciable items of property with similar useful lives, if:

1. You account for each one in a separate account, and

2. You use the average useful life to figure depreciation.

However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives.

If you have a large number of depreciable property items and use average useful lives to figure depreciation, you cannot deduct the los­ ses upon normal retirements from these ac­ counts.

Abandoned property. If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. However, your intent must be to

discard the property so that you will not use it again or retrieve it for sale, exchange, or other disposition.

Basis of property retired. The basis for figur­ ing gain or loss on the retirement of property is its adjusted basis at the time of retirement, as determined in the following discussions.

Single item accounts. If an item of prop­ erty is accounted for in a single item account, the adjusted basis is the basis you would use to figure gain or loss for a sale or exchange of the property. This is generally the cost or other ba­ sis of the item of property less depreciation. See Pub. 551.

Multiple property account. For a normal retirement from a multiple property account, if you figured depreciation using the average ex­ pected useful life, the adjusted basis is the sal­ vage value estimated for the item of property when it was originally acquired. If you figured depreciation using the maximum expected use­ ful life of the longest lived item of property in the account, you must use the depreciation method used for the multiple property account and a rate based on the maximum expected useful life of the item of property retired.

You make the adjustment for depreciation for an abnormal retirement from a multiple prop­ erty account at the rate that would be proper if the item of property was depreciated in a single property account. The method of depreciation used for the multiple property account is used. You base the rate on either the average expec­ ted useful life or the maximum expected useful life of the retired item of property, depending on the method used to determine the depreciation rate for the multiple property account.

Topics This chapter discusses:

Listed property defined The predominant use test What records must be kept

Useful Items You may want to see:

Publication

Form (and Instructions)

2106­EZ Unreimbursed Employee

Business Expenses

Chapter 3 Listed Property Page 9

463

587

946

Travel, Entertainment, Gift, and Car Expenses

Business Use of Your Home

How To Depreciate Property

3­year property . . . . . . . . . . . 5 years 5­year property . . . . . . . . . . . 12 years 10­year property . . . . . . . . . . 25 years 18­year real property . . . . . . 40 years 19­year real property . . . . . . 40 years

If you must use the above recovery periods for listed property not used predominantly in a trade or business, use the percentages from Table 16 titled Listed Property Not Used Pre- dominantly (Other Than 18- or 19-Year Real Property), and Table 17 for 18­ or 19­year real property, near the end of this publication in the Appendix.

Listed property placed in service after 1986. For information on listed property placed in service after 1986, see Pub. 946.

Meeting the Predominant Use Test

Listed property meets the predominant use test for any tax year if its business use is more than 50% of its total use. You must allocate the use of any item of listed property used for more than one purpose during the tax year among its vari­ ous uses. The percentage of investment use of listed property cannot be used as part of the percentage of qualified business use to meet the predominant use test. However, the com­ bined total of business and investment use is taken into account to figure your depreciation deduction for the property.

Note. Property does not stop being pre­ dominantly used in a qualified business use be­ cause of a transfer at death.

Example. Sarah Bradley uses a home computer 50% of the time to manage her in­ vestments. She also uses the computer 40% of the time in her part­time consumer research business. Sarah's home computer is listed property because it is not used at a regular business establishment. Because her business use of the computer does not exceed 50%, the computer is not predominantly used in a quali­ fied business use for the tax year. Because she does not meet the predominant use test, she cannot elect a section 179 deduction for this property. Her combined rate of business/

2106

4255

4562

Employee Business Expenses

Recapture of Investment Credit

Depreciation and Amortization

This chapter discusses some special rules and recordkeeping requirements for listed property. For complete coverage of the rules, including the rules concerning passenger automobiles, see Pub. 946.

If listed property is not used predominantly (more than 50%) in a qualified business use as discussed in Predominant Use Test, later, the section 179 deduction is not allowable and the property must be depreciated using the straight line method.

Listed property is any of the following.

1. Any passenger automobile (defined later).

2. Any other property used for transportation.

3. Any property of a type generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video recording equipment).

4. Any computer and related peripheral equipment, defined later, unless it is used only at a regular business establishment and owned or leased by the person oper­ ating the establishment. A regular busi­ ness establishment includes a portion of a dwelling unit (defined later), if, and only if, that portion is used both regularly and ex­ clusively for business as discussed in Pub.

Passenger Automobile Defined

A passenger automobile is any four­wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (at 6,000 pounds or less of gross vehicle weight for trucks and vans). It includes any part, compo­ nent, or other item physically attached to the automobile or usually included in the purchase price of an automobile.

A passenger automobile does not include:

1. An ambulance, hearse, or combination ambulance­hearse used directly in a trade or business; and

2. A vehicle used directly in the trade or busi­ ness of transporting persons or property for compensation or hire.

Dwelling Unit

A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. It does not include a unit in a hotel, motel, inn, or other establishment where more than half the units are used on a transient basis.

Page 10 Chapter 3 Listed Property

Other Property Used for Transportation

Other property used for transportation includes trucks, buses, boats, airplanes, motorcycles, and any other vehicles for transporting persons or goods.

Listed property does not include:

1. Any vehicle which, by reason of its design, is not likely to be used more than a mini­ mal amount for personal purposes, such as clearly marked police and fire vehicles, ambulances, or hearses used for those purposes;

2. Any vehicle that is designed to carry cargo and that has a loaded gross vehicle weight over 14,000 pounds, bucket trucks (cherry pickers), cement mixers, combines, cranes and derricks, delivery trucks with seating only for the driver (or only for the driver plus a folding jump seat), dump trucks (including garbage trucks), flatbed trucks, forklifts, qualified moving vans, qualified specialized utility repair trucks, and refrigerated trucks;

3. Any passenger bus used for that purpose with a capacity of at least 20 passengers and school buses;

4. Any tractor or other special purpose farm vehicle, and unmarked vehicles used by law enforcement officers if the use is offi­ cially authorized; and

5. Any vehicle, such as a taxicab, if substan­ tially all its use is in the trade or business of providing services to transport persons or property for compensation or hire by un­ related persons.

Computers and Related Peripheral Equipment

A computer is a programmable electronically activated device that:

1. Is capable of accepting information, apply­ ing prescribed processes to the informa­ tion, and supplying the results of those processes with or without human interven­ tion; and

2. Consists of a central processing unit with extensive storage, logic, arithmetic, and control capabilities.

Related peripheral equipment is any auxili­ ary machine which is designed to be controlled by the central processing unit of a computer.

Computer or peripheral equipment does not include:

1. Any equipment which is an integral part of property which is not a computer;

2. Typewriters, calculators, adding and ac­ counting machines, copiers, duplicating equipment, and similar equipment; and

3. Equipment of a kind, used primarily for the user's amusement or entertainment, such as video games.

If “listed property,” defined earlier, placed in service after June 18, 1984, is not used pre­ dominantly (more than 50%) in a qualified busi­ ness use during any tax year:

The section 179 deduction on the property is not allowable, and You must depreciate the property using the straight line method.

Listed property placed in service before 1987. For listed property placed in service be­ fore 1987, depreciate the property over the fol­ lowing period:

Class of Property

Listed Property Recovery Period

Method of Allocating Use

For passenger automobiles and other means of transportation, allocate the property's use on the basis of mileage. You determine the per­ centage of qualified business use by dividing the number of miles the vehicle is driven for business purposes during the year by the total number of miles the vehicle is driven for all pur­ poses (including business miles) during the year.

For other items of listed property, allocate the property's use on the basis of the most ap­ propriate unit of time. For example, you can de­ termine the percentage of business use of a computer by dividing the number of hours the computer is used for business purposes during the year by the total number of hours the com­ puter is used for all purposes (including busi­ ness hours) during the year.

Applying the Predominant Use Test

You must apply the predominant use test for an item of listed property each year of the recovery period.

First Recovery Year

If any item of listed property is not used pre­ dominantly in a qualified business use in the year it is placed in service:

1. The property is not eligible for a section 179 deduction, and

2. The depreciation deduction must be fig­ ured using the straight line method.

Note. The required use of the straight line method for an item of listed property that does not meet the predominant use test is not the same as electing the straight line method. It does not mean that you have to use the straight line method for other property in the same class as the item of listed property.

Years After the First Recovery Year

If you use listed property predominantly (more than 50%) in a qualified business use in the tax year you place it in service, but not in a subse­ quent tax year during the recovery period, the following rules apply.

1. Figure depreciation using the straight line method. Do this for each year, beginning with the year you no longer use the prop­ erty predominantly in a qualified business use.

2. Figure any excess depreciation on the property and add it to:

a. Your gross income, and

b. The adjusted basis of your property.

See Recapture of excess depreciation next.

Recapture of excess depreciation. You must include any excess depreciation in your gross income for the first tax year the property

Chapter 3 Listed Property Page 11

investment use for determining her depreciation deduction is 90%.

Qualified Business Use

A qualified business use is any use in your trade or business. However, it does not include:

1. The use of property held merely to pro­ duce income (investment use),

2. The leasing of property to any 5% owner or related person (to the point that the property is used by a 5% owner or person related to the owner or lessee of the prop­ erty),

3. The use of property as compensation for the performance of services by a 5% owner or related person, or

4. The use of property as compensation for the performance of services by any person (other than a 5% owner or related per- son ) unless the value of the use is inclu­ ded in that person's gross income for the use of the property and income tax is with­ held on that amount where required. See Employees, later.

5% owner. A 5% owner of a business, other than a corporation, is any person who owns more than 5% of the capital or profits interest in the business.

A 5% owner of a corporation is any person who owns, or is considered to own:

More than 5% of the outstanding stock of the corporation, or Stock possessing more than 5% of the to­ tal combined voting power of all stock in the corporation.

Related person. A related person is anyone related to a taxpayer as discussed under Rela- ted persons in chapter 1 in Pub. 946.

Entertainment Use

The use of listed property for entertainment, recreation, or amusement purposes is treated as a qualified business use only to the extent that expenses (other than interest and property tax expenses) for its use are deductible as ordi­ nary and necessary business expenses. See Pub. 463.

Leasing or Compensatory Use of Aircraft

If at least 25% of the total use of any aircraft during the tax year is for a qualified business use, the leasing or compensatory use of the air­ craft by a 5% owner or related person is treated as a qualified business use.

Commuting

The use of a vehicle for commuting is not busi­ ness use, regardless of whether work is per­ formed during the trip.

Use of Your Passenger Automobile by Another Person

If someone else uses your automobile, that use is not business use unless:

1. That use is directly connected with your business,

2. The value of the use is properly reported by you as income to the other person and tax is withheld on the income where re­ quired, or

3. The value of the use results in a payment of fair market rent.

Any payment to you for the use of the automo­ bile is treated as a rent payment for purposes of item (3).

Employees

Any use by an employee of his or her own listed property (or listed property rented by an em­ ployee) in performing services as an employee is not business use unless:

The use is for the employer's convenience, and The use is required as a condition of em­ ployment.

Use for the employer's convenience. Whether the use of listed property is for the em­ ployer's convenience must be determined from all the facts. The use is for the employer's con­ venience if it is for a substantial business rea­ son of the employer. The use of listed property during the employee's regular working hours to carry on the employer's business is generally for the employer's convenience.

Use required as a condition of employment. Whether the use of listed property is a condition of employment depends on all the facts and cir­ cumstances. The use of property must be re­ quired for the employee to perform duties prop­ erly. The employer need not explicitly require the employee to use the property. A mere state­ ment by the employer that the use of the prop­ erty is a condition of employment is not suffi­ cient.

Example 1. Virginia Sycamore is employed as a courier with We Deliver which provides lo­ cal courier services. She owns and uses a mo­ torcycle to deliver packages to downtown offi­ ces. We Deliver explicitly requires all delivery persons to own a small car or motorcycle for use in their employment. The company reimbur­ ses delivery persons for their costs. Virginia's use of the motorcycle is for the convenience of We Deliver and is required as a condition of employment.

Example 2. Bill Nelson is an inspector for Uplift, a construction company with many sites in the local area. He must travel to these sites on a regular basis. Uplift does not furnish an au­ tomobile or explicitly require him to use his own automobile. However, it reimburses him for any costs he incurs in traveling to the various sites. The use of his own automobile or a rental auto­ mobile is for the convenience of Uplift and is re­ quired as a condition of employment.

is not predominantly used in a qualified busi­ ness use. Any excess depreciation must also be added to the adjusted basis of your property. Excess depreciation is the excess (if any) of:

1. The amount of depreciation allowable for the property (including any section 179 deduction claimed) for tax years before the first tax year the property was not pre­ dominantly used in a qualified business use, over

2. The amount of depreciation that would have been allowable for those years if the property were not used predominantly in a qualified business use for the year it was placed in service. This means you figure your depreciation using the percentages from Table 16 or 17.

For information on investment credit recapture, see the instructions for Form 4255.

When listed property (other than passenger au­ tomobiles) is used for business, investment, and personal purposes, no deduction is ever al­ lowable for the personal use. In tax years after the recovery period, you must determine if there is any unrecovered basis remaining before you compute the depreciation deduction for that tax year. To make this determination, figure the de­ preciation for earlier tax years as if your prop­ erty were used 100% for business or invest­ ment purposes, beginning with the first tax year in which some or all use is for business or in­ vestment. See Car Used 50% or Less for Busi- ness in chapter 4 of Pub. 463.

The limitations on cost recovery deductions ap­ ply to the rental of listed property. The following discussion covers the rules that apply to the les­ sor (the owner of the property) and the lessee (the person who rents the property from the owner). See Leasing a Car in chapter 4 of Pub. 463 for a discussion of leased passenger auto­ mobiles.

Lessor

The limitations on cost recovery generally do not apply to any listed property leased or held for leasing by anyone regularly engaged in the business of leasing listed property.

A person is considered regularly engaged in the business of leasing listed property only if contracts for leasing of listed property are en­ tered into with some frequency over a continu­ ous period of time. This determination is made on the basis of the facts and circumstances in each case and takes into account the nature of the person's business in its entirety. Occasional or incidental leasing activity is insufficient. For example, a person leasing only one passenger automobile during a tax year is not regularly en­ gaged in the business of leasing automobiles. An employer who allows an employee to use

Page 12 Chapter 3 Listed Property

the employer's property for personal purposes and charges the employee for the use is not regularly engaged in the business of leasing the property used by the employee.

Lessee

A lessee of listed property (other than passen­ ger automobiles) must include an amount in gross income called the inclusion amount for the first tax year the property is not used pre­ dominantly in a qualified business use.

Inclusion amount for property leased be­ fore 1987. You determine the inclusion amount for property leased after June 18, 1984, and before 1987 by multiplying the fair market value of the property by both the average busi­ ness/investment use percentage and the appli­ cable percentage. You can find the applicable percentages for listed property that is 5­ or 10­year recovery property in Table 19 or 20 in the Appendix.

The lease term for listed property other than 18­ or 19­year real property, and residen­ tial rental or nonresidential real property, in­ cludes options to renew. For 18­ or 19­year real property and residential rental or nonresidential real property that is listed property, the period of the lease does not include any option to renew at fair market value, determined at the time of renewal. You treat two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar property as one lease.

Special rules. The lessee adds the inclusion amount to gross income in the next tax year if:

The lease term begins within 9 months be­ fore the close of the lessee's tax year, The lessee does not use the property pre­ dominantly in a qualified business use dur­ ing that portion of the tax year, and The lease term continues into the lessee's next tax year.

The lessee determines the inclusion amount by taking into account the average of the business/ investment use for both tax years and the appli­ cable percentage for the tax year the lease term begins.

If the lease term is less than one year, the amount included in gross income is the amount that bears the same ratio to the additional inclu­ sion amount as the number of days in the lease term bears to 365.

Maximum inclusion amount. The inclusion amount cannot be more than the sum of the de­ ductible amounts of rent allocable to the les­ see's tax year in which the amount must be in­ cluded in gross income.

You cannot take any depreciation or section 179 deduction for the use of listed property (in­ cluding passenger automobiles) unless you can prove business/investment use with adequate records or sufficient evidence to support your own statements.

How long to keep records. For listed prop­ erty, records must be kept for as long as any excess depreciation can be recaptured (inclu­ ded in income).

Adequate Records

To meet the adequate records requirement, you must maintain an account book, diary, log, statement of expense, trip sheet, or similar re­ cord or other documentary evidence that, to­ gether with the receipt, is sufficient to establish each element of an expenditure or use. It is not necessary to record information in an account book, diary, or similar record if the information is already shown on the receipt. However, your records should back up your receipts in an or­ derly manner.

Elements of Expenditure or Use

The records or other documentary evidence must support:

1. The amount of each separate expenditure, such as the cost of acquiring the item, maintenance and repair costs, capital im­ provement costs, lease payments, and any other expenses;

2. The amount of each business and invest­ ment use (based on an appropriate meas­ ure, such as mileage for vehicles and time for other listed property), and the total use of the property for the tax year;

3. The date of the expenditure or use; and

4. The business or investment purpose for the expenditure or use.

Written documents of your expenditure or use are generally better evidence than oral statements alone. A written record prepared at or near the time of the expenditure or use has greater value as proof of the expenditure or use. A daily log is not required. However, some type of record containing the elements of an ex­ penditure or the business or investment use of listed property made at or near the time and backed up by other documents is preferable to a statement prepared later.

Timeliness

The elements of an expenditure or use must be recorded at the time you have full knowledge of the elements. An expense account statement made from an account book, diary, or similar re­ cord prepared or maintained at or near the time of the expenditure or use is generally consid­ ered a timely record if in the regular course of business:

1. The statement is submitted by an em­ ployee to the employer, or

2. The statement is submitted by an inde­ pendent contractor to the client or cus­ tomer.

For example, a log maintained on a weekly basis, which accounts for use during the week, will be considered a record made at or near the time of use.

Business Purpose Supported

An adequate record of business purpose must generally be in the form of a written statement. However, the amount of backup necessary to establish a business purpose depends on the facts and circumstances of each case. A written explanation of the business purpose will not be required if the purpose can be determined from the surrounding facts and circumstances. For example, a salesperson visiting customers on an established sales route will not normally need a written explanation of the business pur­ pose of his or her travel.

Business Use Supported

An adequate record contains enough informa­ tion on each element of every business or in­ vestment use. The amount of detail required to support the use depends on the facts and cir­ cumstances. For example, a taxpayer whose only business use of a truck is to make cus­ tomer deliveries on an established route can satisfy the requirement by recording the length of the route, including the total number of miles driven during the tax year and the date of each trip at or near the time of the trips.

Although an adequate record generally must be written, a record of the business use of listed property, such as a computer or automobile, can be prepared in a computer memory device using a logging program.

Separate or Combined Expenditures or Uses

Each use by you is normally considered a sepa­ rate use. However, repeated uses can be com­ bined as a single item.

Each expenditure is recorded as a separate item and not combined with other expenditures. If you choose, however, amounts spent for the use of listed property during a tax year, such as for gasoline or automobile repairs, can be com­ bined. If these expenses are combined, you do not need to support the business purpose of each expense. Instead, you can divide the ex­ penses based on the total business use of the listed property.

Uses which can be considered part of a sin­ gle use, such as a round trip or uninterrupted business use, can be accounted for by a single record. For example, use of a truck to make de­ liveries at several locations which begin and end at the business premises and can include a stop at the business in between deliveries can be accounted for by a single record of miles driven. Use of a passenger automobile by a salesperson for a business trip away from home over a period of time can be accounted for by a single record of miles traveled. Minimal per­ sonal use (such as a stop for lunch between two business stops) is not an interruption of business use.

Confidential Information

If any of the information on the elements of an expenditure or use is confidential, it does not

need to be in the account book or similar record if it is recorded at or near the time of the expen­ diture or use. It must be kept elsewhere and made available as support to the district director on request.

Substantial Compliance

If you have not fully supported a particular ele­ ment of an expenditure or use, but have com­ plied with the adequate records requirement for the expenditure or use to the district director's satisfaction, you can establish this element by any evidence the district director deems ade­ quate.

If you fail to establish that you have substan­ tially complied with the adequate records re­ quirement for an element of an expenditure or use to the district director's satisfaction, you must establish the element:

1. By your own oral or written statement con­ taining detailed information as to the ele­ ment, and

2. By other evidence sufficient to establish the element.

If the element is the cost or amount, time, place, or date of an expenditure or use, its sup­ porting evidence must be direct, such as oral testimony by witnesses or a written statement setting forth detailed information about the ele­ ment or the documentary evidence. If the ele­ ment is the business purpose of an expendi­ ture, its supporting evidence can be circumstantial evidence.

Sampling

You can maintain an adequate record for por­ tions of a tax year and use that record to sup­ port your business and investment use for the entire tax year if it can be shown by other evi­ dence that the periods for which an adequate record is maintained are representative of use throughout the year.

Loss of Records

When you establish that failure to produce ade­ quate records is due to loss of the records through circumstances beyond your control, such as through fire, flood, earthquake, or other casualty, you have the right to support a deduc­ tion by reasonable reconstruction of your ex­ penditures and use.

Reporting Information on Form 4562

If you claim a deduction for any listed property, you must provide the requested information on page 2 of Form 4562. If you claim a deduction for any vehicle, you must answer certain ques­ tions on page 2 of Form 4562 to provide infor­ mation about the vehicle use.

Employees. Employees claiming the standard mileage rate or actual expenses (including de­ preciation) must use Form 2106 instead of Part V of Form 4562. Employees claiming the stand­

ard mileage rate may be able to use Form 2106­EZ.

Employer who provides vehicles to employ­ ees. An employer who provides vehicles to employees must obtain enough information from those employees to provide the requested information on Form 4562.

An employer who provides more than five vehicles to employees need not include any in­ formation on his or her tax return. Instead, the employer must obtain the information from his or her employees and indicate on his or her re­ turn that the information was obtained and is being retained.

You do not need to provide the information requested on page 2 of Form 4562 if, as an em­ ployer:

1. You can satisfy the requirements of a writ­ ten policy statement for vehicles either not used for personal purposes, or not used for personal purposes other than commut­ ing; or

2. You treat all vehicle use by employees as personal use.

See the Instructions for Form 4562.

When listed property is used for business, in­ vestment, and personal purposes, no deduction is allowable for its personal use either in the current year or any later tax year. In later years, you must determine if there is any remaining unadjusted or unrecovered basis before you compute the depreciation deduction for that tax year. In making this determination, figure the depreciation deductions for earlier tax years as if the listed property were used 100% for busi­ ness or investment purposes in those years, be­ ginning with the first tax year in which some or all of the property use is for business or invest­ ment.

For more information about deductions after the recovery period for automobiles, see Pub. 463.

If you have questions about a tax issue, need help preparing your tax return, or want to down­ load free publications, forms, or instructions, go to IRS.gov and find resources that can help you right away.

Preparing and filing your tax return. Find free options to prepare and file your return on IRS.gov or in your local community if you qual­ ify.

The Volunteer Income Tax Assistance (VITA) program offers free tax help to people who generally make $54,000 or less, persons with disabilities, the elderly, and limited­Eng­ lish­speaking taxpayers who need help prepar­ ing their own tax returns. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are

Publication 534 (November 2016) Page 13

60 years of age and older. TCE volunteers spe­ cialize in answering questions about pensions and retirement­related issues unique to seniors.

You can go to IRS.gov and click on the Fil­ ing tab to see your options for preparing and fil­ ing your return which include the following.

Free File. Go to IRS.gov/freefile . See if you qualify to use brand­name software to prepare and e-file your federal tax return for free. VITA. Go to IRS.gov/vita, download the free IRS2Go app, or call 1­800­906­9887 to find the nearest VITA location for free tax preparation. TCE. Go to IRS.gov/tce, download the free IRS2Go app, or call 1­888­227­7669 to find the nearest TCE location for free tax preparation.

Getting answers to your tax law questions. On IRS.gov get answers to your tax questions anytime, anywhere.

Go to IRS.gov/help or IRS.gov/letushelp pages for a variety of tools that will help you get answers to some of the most com­ mon tax questions. Go to IRS.gov/ita for the Interactive Tax Assistant, a tool that will ask you questions on a number of tax law topics and provide answers. You can print the entire interview and the final response for your records. Go to IRS.gov/pub17 to get Pub. 17, Your Federal Income Tax for Individuals, which features details on tax­saving opportuni­ ties, tax changes, and thousands of inter­ active links to help you find answers to your questions. View it online in HTML or as a PDF or, better yet, download it to your mobile device to enjoy eBook features. You may also be able to access tax law in­ formation in your electronic filing software.

Getting tax forms and publications. Go to IRS.gov/forms to view, download, or print all of the forms and publications you may need. You can also download and view popular tax publi­ cations and instructions (including the 1040 in­ structions) on mobile devices as an eBook at no charge. Or, you can go to IRS.gov/orderforms to place an order and have forms mailed to you within 10 business days.

Using direct deposit. The fastest way to re­ ceive a tax refund is to combine direct deposit and IRS e-file . Direct deposit securely and elec­ tronically transfers your refund directly into your financial account. Eight in 10 taxpayers use di­ rect deposit to receive their refund. IRS issues more than 90% of refunds in less than 21 days.

Delayed refund for returns claiming certain credits. Due to changes in the law, the IRS can’t issue refunds before February 15, 2017, for 2016 returns that claim the earned income credit (EIC) or the additional child tax credit (ACTC). This applies to the entire refund, not just the portion associated with these credits.

Getting a transcript or copy of a return. The quickest way to get a copy of your tax transcript is to go to IRS.gov/transcripts . Click on either "Get Transcript Online" or "Get Transcript by

Mail" to order a copy of your transcript. If you prefer, you can:

Order your transcript by calling 1­800­908­9946. Mail Form 4506­T or Form 4506T­EZ (both available on IRS.gov).

Making a tax payment. The IRS uses the lat­ est encryption technology to ensure your elec­ tronic payments are safe and secure. You can make electronic payments online, by phone, and from a mobile device using the IRS2Go app. Paying electronically is quick, easy, and faster than mailing in a check or money order. Go to IRS.gov/payments to make a payment using any of the following options.

IRS Direct Pay : Pay your individual tax bill or estimated tax payment directly from your checking or savings account at no cost to you. Debit or credit card: Choose an ap­ proved payment processor to pay online, by phone, and by mobile device.

Using online tools to help prepare your re­ turn. Go to IRS.gov/tools for the following.

The Earned Income Tax Credit Assistant ( IRS.gov/eic ) determines if you are eligible for the EIC. The Online EIN Application ( IRS.gov/ein ) helps you get an employer identification number. The IRS Withholding Calculator ( IRS.gov/ w4app ) estimates the amount you should have withheld from your paycheck for fed­ eral income tax purposes. The First Time Homebuyer Credit Account Look-up ( IRS.gov/homebuyer ) tool pro­ vides information on your repayments and account balance. The Sales Tax Deduction Calculator ( IRS.gov/salestax ) figures the amount you can claim if you itemize deductions on Schedule A (Form 1040), choose not to claim state and local income taxes, and you didn’t save your receipts showing the sales tax you paid.

Resolving tax­related identity theft issues.

The IRS doesn’t initiate contact with tax­ payers by email or telephone to request personal or financial information. This in­ cludes any type of electronic communica­ tion, such as text messages and social me­ dia channels. Go to IRS.gov/idprotection for information and videos. If your SSN has been lost or stolen or you suspect you are a victim of tax­related identity theft, visit IRS.gov/id to learn what steps you should take.

Checking on the status of your refund.

Go to IRS.gov/refunds . Due to changes in the law, the IRS can’t is­ sue refunds before February 15, 2017, for 2016 returns that claim the EIC or the ACTC. This applies to the entire refund, not just the portion associated with these credits. Download the official IRS2Go app to your mobile device to check your refund status. Call the automated refund hotline at 1­800­829­1954.

Electronic Funds Withdrawal: Offered only when filing your federal taxes using tax preparation software or through a tax professional. Electronic Federal Tax Payment Sys­ tem: Best option for businesses. Enroll­ ment is required. Check or money order: Mail your pay­ ment to the address listed on the notice or instructions. Cash: If cash is your only option, you may be able to pay your taxes at a participating retail store.

What if I can’t pay now? Go to IRS.gov/ payments for more information about your op­ tions.

Apply for an online payment agreement ( IRS.gov/opa ) to meet your tax obligation in monthly installments if you can’t pay your taxes in full today. Once you complete the online process, you will receive imme­ diate notification of whether your agree­ ment has been approved. Use the Offer in Compromise Pre-Qualifier ( IRS.gov/oic ) to see if you can settle your tax debt for less than the full amount you owe.

Checking the status of an amended return. Go to IRS.gov and click on Where’s My Amended Return? ( IRS.gov/wmar ) under the “Tools” bar to track the status of Form 1040X amended returns. Please note that it can take up to 3 weeks from the date you mailed your amended return for it show up in our system and processing it can take up to 16 weeks.

Understanding an IRS notice or letter. Go to IRS.gov/notices to find additional information about responding to an IRS notice or letter.

Contacting your local IRS office. Keep in mind, many questions can be resolved on IRS.gov without visiting an IRS Tax Assistance Center (TAC). Go to IRS.gov/letushelp for the topics people ask about most. If you still need help, IRS TACs provide tax help when a tax is­ sue can’t be handled online or by phone. All TACs now provide service by appointment so you’ll know in advance that you can get the service you need without waiting. Before you visit, go to IRS.gov/taclocator to find the nearest TAC, check hours, available services, and ap­ pointment options. Or, on the IRS2Go app, un­ der the Stay Connected tab, choose the Con­ tact Us option and click on “Local Offices.”

Watching IRS videos. The IRS Video portal ( IRSvideos.gov ) contains video and audio pre­ sentations for individuals, small businesses, and tax professionals.

Getting tax information in other languages. For taxpayers whose native language isn’t Eng­ lish, we have the following resources available. Taxpayers can find information on IRS.gov in the following languages.

Spanish ( IRS.gov/spanish ). Chinese ( IRS.gov/chinese ). Vietnamese ( IRS.gov/vietnamese ). Korean ( IRS.gov/korean ). Russian ( IRS.gov/russian ).

Page 14 Publication 534 (November 2016)

The IRS TACs provide over­the­phone inter­ preter service in over 170 languages, and the service is available free to taxpayers.

The Taxpayer Advocate Service Is Here To Help You What is the Taxpayer Advocate Service?

The Taxpayer Advocate Service (TAS) is an in- dependent organization within the IRS that helps taxpayers and protects taxpayer rights. Our job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights .

What Can the Taxpayer Advocate Service Do For You?

We can help you resolve problems that you can’t resolve with the IRS. And our service is free. If you qualify for our assistance, you will be assigned to one advocate who will work with you throughout the process and will do every­ thing possible to resolve your issue. TAS can help you if:

Your problem is causing financial difficulty for you, your family, or your business,

You face (or your business is facing) an immediate threat of adverse action, or You’ve tried repeatedly to contact the IRS but no one has responded, or the IRS hasn’t responded by the date promised.

How Can You Reach Us?

We have offices in every state, the District of Columbia, and Puerto Rico . Your local advo­ cate’s number is in your local directory and at taxpayeradvocate.irs.gov . You can also call us at 1­877­777­4778.

How Can You Learn About Your Taxpayer Rights?

The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Our Tax Toolkit at taxpayeradvocate.irs.gov can help you under­ stand what these rights mean to you and how they apply. These are your rights. Know them. Use them.

How Else Does the Taxpayer Advocate Service Help Taxpayers?

TAS works to resolve large­scale problems that affect many taxpayers. If you know of one of these broad issues, please report it to us at IRS.gov/sams .

Low Income Taxpayer Clinics

Low Income Taxpayer Clinics (LITCs) serve in­ dividuals whose income is below a certain level and need to resolve tax problems such as au­ dits, appeals, and tax collection disputes. Some clinics can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. To find a clinic near you, visit IRS.gov/litc or see IRS Publication 4134, Low Income Taxpayer Clinic List .

The following tables are for use in figuring de­ preciation deductions under the ACRS system.

Publication 534 (November 2016) Page 15

ACRS Percentage Tables Table 1. 15­Year Real Property (Other Than Low­Income Housing)*

Table 2. Low­Income Housing*

Page 16 Publication 534 (November 2016)

Table 3. Low­Income Housing*

Table 4. 18­Year Real Property*

Table 5. 18­Year Real Property*

Publication 534 (November 2016) Page 17

Table 6. 19­Year Real Property*

Table 7. 18­Year Real Property*

Table 8. 18­Year Real Property*

Table 9. 19­Year Real Property*

Table 10. 18­Year Real Property*

Page 18 Publication 534 (November 2016)

Table 11. 18­Year Real Property ¹ 15­Year Real Property and Low­Income Housing ²

Month Placed in Service

Year 1–2 3–6 7–12

1st 3.0% 2.0% 1.0% 2­30th 3.0 3.0 3.0 31­35th 2.0 2.0 2.0 36th - 1.0 2.0

1 Placed In Service After March 15 and Before June 23, 1984

2 Placed In Service Before May 9, 1985 If Alternate ACRS Method Elected Over 35­Year Period

Table 12. Low­Income Housing*

Month Placed in Service

Year 1 2 3 4 5 6 7 8 9 10 11 12

1st 2.9% 2.6% 2.4% 2.1% 1.9% 1.7% 1.4% 1.2% 1.0% 0.7% 0.5% 0.2% 2­20th 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 21­35th 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 36th - 0.3 0.5 0.8 1.0 1.2 1.5 1.7 1.9 2.2 2.4 2.7

• Placed In Service After May 8, 1985 If Alternate ACRS Method Elected Over 35­Year Period

Table 13. 19­Year Real Property*

Month Placed in Service

Year 1 2 3 4 5 6 7 8 9 10 11 12

1st 2.7% 2.5% 2.3% 2.0% 1.8% 1.5% 1.3% 1.1% 0.8% 0.6% 0.4% 0.1% 2­20th 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 21­35th 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 36th 0.2 0.4 0.6 0.9 1.1 1.4 1.6 1.8 2.1 2.3 2.5 2.8

• If Alternate ACRS Method Elected Over 35­Year Period

Table 14. 18­Year Real Property ¹ 19­Year Real Property ²

Month Placed in Service

Year 1 2 3 4 5 6 7 8 9 10 11 12

1st 2.1% 1.9% 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.5% 0.3% 0.1% 2­11th 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 12­45th 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 46th 0.1 0.3 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.7 1.9 2.1

1 Placed In Service After June 22, 1984

2 If Alternate ACRS Method Elected Over a 45­Year Period

Table 15. 18­Year Real Property ¹ 15­Year Real Property and Low­Income Housing ²

Month Placed in Service

Year 1 2 3 4 5 6 7 8 9 10 11 12

1st 2.3% 2.0% 1.9% 1.7% 1.5% 1.3% 1.2% 0.9% 0.7% 0.6% 0.4% 0.2% 2­10th 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 11­45th 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 46th - 0.3 0.4 0.6 0.8 1.0 1.1 1.4 1.6 1.7 1.9 2.1

1 Placed In Service After March 15 and Before June 23, 1984

2 Placed In Service After December 31, 1980 If Alternate ACRS Method Elected Over a 45­Year Period

Publication 534 (November 2016) Page 19

Table 16. Listed Property Not Used Predominantly (Other Than 18­ or 19­ Year Real Property)

Recovery Period

Year 5 12 25

1st 10.0% 4.0% 2.0% 2nd­5th 20.0 9.0 4.0 6th 10.0 8.0 4.0 7th­12th - 8.0 4.0 13th - 4.0 4.0 14th­25th - - 4.0 26th - - 2.0

Table 17. 40­Year Recovery Period (For 18­ or 19­Year Listed Property Not Used Predominantly)

Month Placed in Service

Year 1 2 3 4 5 6 7 8 9 10 11 12

1st 2.4% 2.2% 2.0% 1.8% 1.6% 1.4% 1.1% 0.9% 0.7% 0.5% 0.3% 0.1% 2­40th 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 41st 0.1 0.3 0.5 0.7 0.9 1.1 1.4 1.6 1.8 2.0 2.2 2.4

Table 18. 3­Year Recovery Property

Tax year during the lease term that the business percentage decreases to 50% or less

Lease Term 1 2 3 4 5 6 and later

1 Year 3.00% 2 Years 6.00 1.25% 3 Years 10.20 6.20 2.25% 4 Years or more 13.20 10.40 6.50 1.70% 0.50% 0.00%

Table 19. 5­Year Recovery Property

Tax year during the lease term that the business percentage decreases to 50% or less

Lease Term 1 2 3 4 5 6 7 8 9 10 11 12

1 Year 2.7% 2 Years 5.3 1.2% 3 Years 9.9 6.1 1.6% 4 Years 14.4 11.1 7.3 2.3% 5 Years 18.4 15.7 12.4 8.2 3.0% 6 Years or more 21.8 19.6 16.7 13.5 9.6 5.25% 4.4% 3.6% 2.8% 1.8% 1.0% 0%

Table 20. 10­Year Recovery Property

Tax year during the lease term that the business percentage decreases to 50% or less

Lease Term 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

1 Year 2.5% 2 Years 5.1 0.6% 3 Years 9.8 5.6 1.0% 4 Years 14.0 10.3 6.2 1.4% 5 Years 17.9 14.5 10.9 6.7 1.8%

6 Years 21.3 18.3 15.1 11.4 7.1 2.1% 7 Years 21.9 19.0 15.9 12.4 8.4 3.9 2.4% 8 Years 22.4 19.6 16.7 13.4 9.7 5.5 4.5 2.7% 9 Years 22.9 20.2 17.4 14.3 10.9 7.0 6.4 5.1 3.0% 10 Years 23.5 20.9 18.2 15.2 11.9 8.3 8.1 7.2 5.7 3.3%

11 Years 23.9 21.4 18.8 16.0 12.8 9.3 9.4 8.9 7.7 5.9 3.1% 12 Years 24.3 21.9 19.3 16.5 13.4 10.1 10.3 10.0 9.3 7.8 5.5 2.9% 13 Years 24.7 22.2 19.7 16.9 14.0 10.7 11.1 11.0 10.4 9.2 7.4 5.2 2.7% 14 Years 25.0 22.5 20.1 17.3 14.4 11.1 11.6 11.7 11.3 10.3 8.8 6.9 4.8 2.5%

15 Years or more 25.3 22.8 20.3 17.5 14.7 11.5 12.0 12.2 11.9 11.1 9.8 8.2 6.5 4.5 2.3%

Page 20 Publication 534 (November 2016)

To help us develop a more useful index, please let us know if you have ideas for index entries. Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

Publications ( See Tax help)

S Salvage value 7 Straight line m et hod 8

T Tax help 13

U Useful life 7

A Accelerated cost recovery

system (ACRS): Accelerated cost recovery

Predominant use test 10 Qualified business us e 1 1 Recordkeeping 12 Related person 11 Reporting on Fo rm 4562 13 Use by employee 11

M Methods of figuring

depreciation 8 ACRS 3 Declini ng Balance 8 Income forecast 8 Straight line 8

Depreciation 6 Excess depre ci ation, listed

system (ACRS): Alternate method 4 Classes of recove ry

R Recapture:

property 3 Deduction, s ho rt tax year 6 Defined 2 Dispositi on s 6 Recovery per io ds 4 Unadjusted basis 3 Assistance ( See Tax h elp)

D Declining balance method 8 Deduction:

ACRS 3 How to fig ure 7 Dispositions 6, 9

I Identity theft 14 Income forec ast method 8

L Listed property 10 Listed property:

property 11 Recordkeepin g:

For listed property 12

B Basis:

Adjusted 7 Unadjuste d, ACRS 3

C Changing methods 8

property 10

5% owner 11 Computers , re lated

equipment 10 Defined 10 Entertain me nt use 11 Leased 12 Other tr ansp ortation

P Passenger automobile:

Defined 10 Predomina nt u se test,

ACRS 2 Intangi ble 7

applying 11 Property:

Publication 534 (November 2016) Page 21