Part II

7. Cost or other basis* . . . . . . . . $10,000

8. Business/investment use . . . . . . . . . . . . . . . . . . . . . . . ^{100 %}

9. Multiply line 7 by line 8 . . . . . . . . . . . . . . $10,000

10. Total claimed for section 179 deduction and other items . . . . . . . . . . -0

11. Subtract line 10 from line 9. This is your tentative basis for depreciation . . . . . . . . . . . . . . . . . . . . . . . $10,000

12. Multiply line 11 by the applicable percentage if the special depreciation allowance applies. This is your special depreciation allowance. Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance . . . . . . . . . -0

13. Subtract line 12 from line 11. This is your basis for depreciation . . . . . . . . . . $10,000

14. Depreciation rate (from line 6) . . . . . . . 0.1429

15. Multiply line 13 by line 14. This is your MACRS depreciation deduction . . . . . $1,429

***** If real estate, do not include cost (basis) of land.

If there are no adjustments to the basis of the property other than depreciation, your depreciation deduction for each subsequent year of the recovery period will be as follows.

Year Basis Percentage Deduction

2024 . . . . . . . . . . $10,000 24.49% $2,449 2025 . . . . . . . . . . 10,000 17.49 1,749 2026 . . . . . . . . . . 10,000 12.49 1,249 2027 . . . . . . . . . . 10,000 8.93 893 2028 . . . . . . . . . . 10,000 8.92 892 2029 . . . . . . . . . . 10,000 8.93 893 2030 . . . . . . . . . . 10,000 4.46 446

Examples

The following examples are provided to show you how to use the percentage tables. In both examples, assume the following.

• You use the property only for business.

• You use the calendar year as your tax year.

• You use GDS for all the properties.

Example 1. You bought a building and land for $120,000 and placed it in service on March 8. The sales contract showed that the building cost $100,000 and the

38 Chapter 4 Figuring Depreciation Under MACRS Publication 946 (2025)

land cost $20,000. It is nonresidential real property. The building’s unadjusted basis is its original cost, $100,000.

You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. March is the third month of your tax year, so multiply the building’s unadjusted basis, $100,000, by the percentages for the third month in Table A-7a. Your depreciation deduction for each of the first 3 years is as follows.

Year Basis Percentage Deduction

1st . . . . . . . . . . . . $100,000 2.033% $2,033 2nd . . . . . . . . . . . 100,000 2.564 2,564 3rd . . . . . . . . . . . 100,000 2.564 2,564

Example 2. During the year, you bought a machine (7-year property) for $4,000, office furniture (7-year property) for $1,000, and a computer (5-year property) for $5,000. You placed the machine in service in January, the furniture in September, and the computer in October. You do not elect a section 179 deduction and none of these items are qualified property for purposes of claiming a special depreciation allowance.

You placed property in service during the last 3 months of the year, so you must first determine if you have to use the mid-quarter convention. The total bases of all property you placed in service during the year are $10,000. The $5,000 basis of the computer, which you placed in service during the last 3 months (the fourth quarter) of your tax year, is more than 40% of the total bases of all property ($10,000) you placed in service during the year. Therefore, you must use the mid-quarter convention for all three items.

You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention. The machine is 7-year property placed in service in the first quarter, so you use Table A-2. The furniture is 7-year property placed in service in the third quarter, so you use Table A-4. Finally, because the computer is 5-year property placed in service in the fourth quarter, you use Table A-5. Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows.

Year Property Basis Percentage Deduction

1st Machine $4,000 25.00 $1,000 2nd Machine 4,000 21.43 857

1st Furniture 1,000 10.71 107 2nd Furniture 1,000 25.51 255

1st Computer 5,000 5.00 250 2nd Computer 5,000 38.00 1,900

Sale or Other Disposition Before the Recovery Period Ends

If you sell or otherwise dispose of your property before the end of its recovery period, your depreciation deduction for

the year of the disposition will be only part of the depreciation amount for the full year. You have disposed of your property if you have permanently withdrawn it from use in your business or income-producing activity because of its sale, exchange, retirement, abandonment, involuntary conversion, or destruction. After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property.

Half-year convention used. For property for which you used a half-year convention, the depreciation deduction for the year of the disposition is half the depreciation determined for the full year.

Mid-quarter convention used. For property for which you used the mid-quarter convention, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter in which you disposed of the property.

Quarter Percentage First . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.5% Second . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.5 Third . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62.5 Fourth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87.5

Example. On December 2, 2022, you placed in service an item of 5-year property costing $10,000. You did not claim a section 179 deduction and the property does not qualify for a special depreciation allowance. Your unadjusted basis for the property was $10,000. You used the mid-quarter convention because this was the only item of business property you placed in service in 2022 and it was placed in service during the last 3 months of your tax year. Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. Your deductions for 2022, 2023, and 2024 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22.80% of $10,000), respectively. You disposed of the property on April 6, 2025. To determine your depreciation deduction for 2025, first figure the deduction for the full year. This is $1,368 (13.68% of $10,000). April is in the second quarter of the year, so you multiply $1,368 by 37.5% (0.375) to get your depreciation deduction of $513 for 2025.

Mid-month convention used. If you dispose of residential rental or nonresidential real property, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by a fraction. The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. The denominator is 12.

Example. On July 2, 2023, you purchased and placed in service residential rental property. The property cost $100,000, not including the cost of land. You used Table A-6 to figure your MACRS depreciation for this property. You sold the property on March 2, 2025. You file your tax return based on the calendar year.

A full year of depreciation for 2025 is $3,636. This is $100,000 multiplied by 0.03636 (the percentage for the

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seventh month of the third recovery year) from Table A-6. You then apply the mid-month convention for the 2 ¹ /2 months of use in 2025. Treat the month of disposition as one-half month of use. Multiply $3,636 by the fraction, 2.5 over 12, to get your 2025 depreciation deduction of $757.50.

Instead of using the rates in the percentage tables to figure your depreciation deduction, you can figure it yourself. Before making the computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year(s).

Caution: Figuring MACRS deductions without using the tables will generally result in a slightly different amount than using the tables.

Declining Balance Method

When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. You must use the applicable convention for the first tax year and you must switch to the straight line method beginning in the first year for which it will give an equal or greater deduction. The straight line method is explained later.

You figure depreciation for the year you place property in service as follows.

1. Multiply your adjusted basis in the property by the declining balance rate.

2. Apply the applicable convention.

You figure depreciation for all other years (before the year you switch to the straight line method) as follows.

1. Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years.

2. Multiply this new adjusted basis by the same declining balance rate used in earlier years.

If you dispose of property before the end of its recovery period, see Using the Applicable Convention , later, for in- formation on how to figure depreciation for the year you dispose of it.

Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1, later, under Examples .

Declining balance rate. You figure your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of years in the property’s recovery period. For example, for 3-year property depreciated using the 200% declining balance method, divide 2.00 (200%) by 3 to get 0.6667, or a 66.67% declining balance rate. For 15-year property depreciated using the 150% declining balance

method, divide 1.50 (150%) by 15 to get 0.10, or a 10% declining balance rate.

The following table shows the declining balance rate for each property class and the first year for which the straight line method gives an equal or greater deduction.

3-year 200% DB 66.667% 3rd

5-year 200% DB 40.0 4th

7-year 200% DB 28.571 5th

10-year 200% DB 20.0 7th

15-year 150% DB 10.0 7th

20-year 150% DB 7.5 9th

Straight Line Method

When using the straight line method, you apply a different depreciation rate each year to the adjusted basis of your property. You must use the applicable convention in the year you place the property in service and the year you dispose of the property.

You figure depreciation for the year you place property in service as follows.

1. Multiply your adjusted basis in the property by the straight line rate.

2. Apply the applicable convention.

You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows.

1. Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method).

2. Determine the depreciation rate for the year.

3. Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2).

If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to figure depreciation for the year you dispose of it.

Straight line rate. You determine the straight line depreciation rate for any tax year by dividing the number 1 by the years remaining in the recovery period at the beginning of that year. When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. If the number of years remaining is less than 1, the depreciation rate for that tax year is 1.0 (100%).

Using the Applicable Convention

The applicable convention (discussed earlier under Which Convention Applies ) affects how you figure your

Property Class Method

Declining Balance

Rate Year

40 Chapter 4 Figuring Depreciation Under MACRS Publication 946 (2025)

depreciation deduction for the year you place your property in service and for the year you dispose of it. It determines how much of the recovery period remains at the beginning of each year, so it also affects the depreciation rate for property you depreciate under the straight line method. See Straight line rate in the previous discussion. Use the applicable convention, as explained in the following discussions.

Half-year convention. If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. You deduct a full year of depreciation for any other year during the recovery period.

Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final 6 months of the recovery period is the amount of your unrecovered basis in the property.

Mid-quarter convention. If this convention applies, the depreciation you can deduct for the first year you depreciate the property depends on the quarter in which you place the property in service.

A quarter of a full 12-month tax year is a period of 3 months. The first quarter in a year begins on the first day of the tax year. The second quarter begins on the first day of the fourth month of the tax year. The third quarter begins on the first day of the seventh month of the tax year. The fourth quarter begins on the first day of the tenth month of the tax year. A calendar year is divided into the following quarters.

Quarter Months First . . . . . . . . . . . . . . January, February, M arch Second . . . . . . . . . . . . April, May, June Third . . . . . . . . . . . . . . July, August, September Fourth . . . . . . . . . . . . . October, November, December

Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by the percentage listed below for the quarter you place the property in service.

Quarter Percentage

First . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87.5% Second . . . . . . . . . . . . . . . . . . . . . . . . . . . 62.5 Third . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.5 Fourth . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.5

If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter you dispose of the property.

Quarter Percentage

First . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.5% Second . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.5 Third . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62.5 Fourth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87.5

If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final quarter of the recovery period is the amount of your unrecovered basis in the property.

Mid-month convention. If this convention applies, the depreciation you can deduct for the first year that you depreciate the property depends on the month in which you place the property in service. Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by a fraction. The numerator of the fraction is the number of full months in the year that the property is in service plus ¹ /2 (or 0.5). The denominator is 12.

If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final month of the recovery period is the amount of your unrecovered basis in the property.

Example. You use the calendar year and place nonresidential real property in service in August. The property is in service 4 full months (September, October, November, and December). Your numerator is 4.5 (4 full months plus 0.5). You multiply the depreciation for a full year by 4.5/12, or 0.375.

Examples

The following examples show how to figure depreciation under MACRS without using the percentage tables. Figures are rounded for purposes of the examples. Assume for all the examples that you use a calendar year as your tax year.

Example 1—200% DB method and half-year con- vention. In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. You do not elect to take the section 179 deduction and the property does not qualify for a special depreciation allowance. You use GDS and the 200% DB method to figure your depreciation. When the SL method results in an equal or larger deduction, you switch to the SL method. You did not place any property in service in the last 3 months of the year, so you must use the half-year convention.

First year. You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery period). The result is 40%. You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. You apply the half-year convention by dividing the result ($400) by 2. Depreciation for the first year under the 200% DB method is $200.

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You figure the depreciation rate under the SL method by dividing 1 by 5, the number of years in the recovery period. The result is 20%.You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. You apply the half-year convention by dividing the result ($200) by 2. Depreciation for the first year under the SL method is $100.

The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method.

Second year. You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). You multiply the result ($800) by the DB rate (40%). Depreciation for the second year under the 200% DB method is $320.

You figure the SL depreciation rate by dividing 1 by 4.5, the number of years remaining in the recovery period. (Based on the half-year convention, you used only half a year of the recovery period in the first year.) You multiply the reduced adjusted basis ($800) by the result (22.22%). Depreciation under the SL method for the second year is $178.

The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method.

Third year. You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). You multiply the result ($480) by the DB rate (40%). Depreciation for the third year under the 200% DB method is $192.

You figure the SL depreciation rate by dividing 1 by 3.5. You multiply the reduced adjusted basis ($480) by the result (28.57%). Depreciation under the SL method for the third year is $137.

The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method.

Fourth year. You reduce the adjusted basis ($480) by the depreciation claimed in the third year ($192). You multiply the result ($288) by the DB rate (40%). Depreciation for the fourth year under the 200% DB method is $115.

You figure the SL depreciation rate by dividing 1 by 2.5. You multiply the reduced adjusted basis ($288) by the result (40%). Depreciation under the SL method for the fourth year is $115.

The SL method provides an equal deduction, so you switch to the SL method and deduct the $115.

Fifth year. You reduce the adjusted basis ($288) by the depreciation claimed in the fourth year ($115) to get the reduced adjusted basis of $173. You figure the SL depreciation rate by dividing 1 by 1.5. You multiply the reduced adjusted basis ($173) by the result (66.67%). Depreciation under the SL method for the fifth year is $115.

Sixth year. You reduce the adjusted basis ($173) by the depreciation claimed in the fifth year ($115) to get the reduced adjusted basis of $58. There is less than 1 year remaining in the recovery period, so the SL depreciation rate for the sixth year is 100%. You multiply the reduced adjusted basis ($58) by 100% to arrive at the depreciation deduction for the sixth year ($58).

Example 2—SL method and mid-month conven- tion. In January, you bought and placed in service a building for $100,000 that is nonresidential real property with a recovery period of 39 years. The adjusted basis of the building is its cost of $100,000. You use GDS, the SL

method, and the mid-month convention to figure your depreciation.

First year. You figure the SL depreciation rate for the building by dividing 1 by 39 years. The result is 0.02564. The depreciation for a full year is $2,564 ($100,000 × 0.02564). Under the mid-month convention, you treat the property as placed in service in the middle of January. You get 11.5 months of depreciation for the year. Expressed as a decimal, the fraction of 11.5 months divided by 12 months is 0.958. Your first-year depreciation for the building is $2,456 ($2,564 × 0.958).

Second year. You subtract $2,456 from $100,000 to get your adjusted basis of $97,544 for the second year. The SL rate is 0.02629. This is 1 divided by the remaining recovery period of 38.042 years (39 years reduced by 11.5 months or 0.958). Your depreciation for the building for the second year is $2,564 ($97,544 × 0.02629).

Third year. The adjusted basis is $94,980 ($97,544 − $2,564). The SL rate is 0.027 (1 divided by 37.042 remaining years). Your depreciation for the third year is $2,564 ($94,980 × 0.027).

Example 3—200% DB method and mid-quarter convention. During the year, you bought and placed in service in your business the following items.

Item

Month Placed in Service Cost

Safe January $4,000

Office furniture September 1,000

Computer October 5,000

You do not elect a section 179 deduction and these items do not qualify for a special depreciation allowance. You use GDS and the 200% DB method to figure the depreciation. The total bases of all property you placed in service this year are $10,000. The basis of the computer ($5,000) is more than 40% of the total bases of all property placed in service during the year ($10,000), so you must use the mid-quarter convention. This convention applies to all three items of property. The safe and office furniture are 7-year property and the computer is 5-year property. First- and second-year depreciation for safe. The 200% DB rate for 7-year property is 0.28571. You determine this by dividing 2.00 (200%) by 7 years. The depreciation for the safe for a full year is $1,143 ($4,000 × 0.28571). You placed the safe in service in the first quarter of your tax year, so you multiply $1,143 by 87.5% (the mid-quarter percentage for the first quarter). The result, $1,000, is your deduction for depreciation on the safe for the first year.

For the second year, the adjusted basis of the safe is $3,000. You figure this by subtracting the first year’s depreciation ($1,000) from the basis of the safe ($4,000). Your depreciation deduction for the second year is $857 ($3,000 × 0.28571).

First- and second-year depreciation for furniture. The furniture is also 7-year property, so you use the same 200% DB rate of 0.28571. You multiply the basis of the

42 Chapter 4 Figuring Depreciation Under MACRS Publication 946 (2025)

furniture ($1,000) by 0.28571 to get the depreciation of $286 for the full year. You placed the furniture in service in the third quarter of your tax year, so you multiply $286 by 37.5% (the mid-quarter percentage for the third quarter). The result, $107, is your deduction for depreciation on the furniture for the first year.

For the second year, the adjusted basis of the furniture is $893. You figure this by subtracting the first year’s depreciation ($107) from the basis of the furniture ($1,000). Your depreciation for the second year is $255 ($893 × 0.28571). First- and second-year depreciation for computer. The 200% DB rate for 5-year property is 0.40. You determine this by dividing 2.00 (200%) by 5 years. The depreciation for the computer for a full year is $2,000 ($5,000 × 0.40). You placed the computer in service in the fourth quarter of your tax year, so you multiply the $2,000 by 12.5% (the mid-quarter percentage for the fourth quarter). The result, $250, is your deduction for depreciation on the computer for the first year.

For the second year, the adjusted basis of the computer is $4,750. You figure this by subtracting the first year’s depreciation ($250) from the basis of the computer ($5,000). Your depreciation deduction for the second year is $1,900 ($4,750 × 0.40).

Example 4—200% DB method and half-year con- vention. Last year, in July, you bought and placed in service in your business a new item of 7-year property. This was the only item of property you placed in service last year. The property cost $39,000 and you elected a $24,000 section 179 deduction. You also made an election under section 168(k)(7) not to deduct the special depreciation allowance for 7-year property placed in service last year. Your unadjusted basis for the property is $15,000. Because you did not place any property in service in the last 3 months of your tax year, you used the half-year convention. You figured your deduction using the percentages in Table A-1 for 7-year property. Last year, your depreciation was $2,144 ($15,000 × 14.29% (0.1429)).

In July of this year, your property was vandalized. You had a deductible casualty loss of $3,000. You spent $3,500 to put the property back in operational order. Your adjusted basis at the end of this year is $13,356. You figured this by first subtracting the first year’s depreciation ($2,144) and the casualty loss ($3,000) from the unadjusted basis of $15,000. To this amount ($9,856), you then added the $3,500 repair cost.

You cannot use the table percentages to figure your depreciation for this property for this year because of the adjustments to basis. You must figure the deduction yourself. You determine the DB rate by dividing 2.00 (200%) by 7 years. The result is 0.28571 or 28.571%. You multiply the adjusted basis of your property ($13,356) by the DB rate of 0.28571 to get your depreciation deduction of $3,816 for this year.

If your property has a carryover basis because you acquired it in a nontaxable transfer such as a like-kind exchange or involuntary conversion, you must generally figure depreciation for the property as if the transfer had not occurred. However, see Like-kind exchanges and involun- tary conversions , earlier, in chapter 3 under How Much Can You Deduct ; and Property Acquired in a Like-Kind Ex- change or Involuntary Conversion next.

Property Acquired in a Like-Kind Exchange or Involuntary Conversion

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

For acquired property that has a longer recovery period or a less accelerated depreciation method than the exchanged or involuntarily converted property, you must generally depreciate the carryover basis of the acquired property as if it were placed in service in the same tax year as the exchanged or involuntarily converted property. You also generally continue to use the longer recovery period and less accelerated depreciation method of the acquired property.

If the MACRS property you acquired in the exchange or involuntary conversion is a new qualified property, discussed earlier in chapter 3 under What Is Qualified Prop- erty, you can claim a special depreciation allowance on at least a portion of the carryover basis. Special rules apply to vehicles acquired in a trade-in before 2018. For information on how to figure depreciation for a vehicle acquired in a trade-in that is subject to the passenger automobile limits, see Deductions for Passenger Automobiles Ac- quired in a Trade-In under Do the Passenger Automobile Limits Apply? in chapter 5.

Caution: Like-kind exchanges completed after December 31, 2017, are generally limited to exchanges of real property not held primarily for sale.

Election out. Instead of using the above rules, you can elect, for depreciation purposes, to treat the adjusted basis of the exchanged or involuntarily converted property as if disposed of at the time of the exchange or involuntary conversion. Treat the carryover basis and excess basis, if any, for the acquired property as if placed in service the later of the date you acquired it or the time of the

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disposition of the exchanged or involuntarily converted property. The depreciable basis of the property acquired is the carryover basis of the property exchanged or involuntarily converted plus any excess basis. The election, if made, applies to both the acquired property and the exchanged or involuntarily converted property. This election does not affect the amount of gain or loss recognized on the exchange or involuntary conversion or the amount of the special depreciation allowance.

When to make the election. You must make the election on a timely filed return (including extensions) for the year of replacement. The election must be made separately by each person acquiring replacement property. In the case of a partnership, an S corporation, or a consolidated group, the election is made by the partnership, by the S corporation, or by the common parent of a consolidated group, respectively. Once made, the election may not be revoked without IRS consent. Note that by making this election, it does not change whether the basis is subject to bonus depreciation, but rather only effects how the depreciation is calculated. See Like-kind exchanges and involuntary conversions under How Much Can You De- duct? in chapter 3.

For more information and special rules, see the Instruc- tions for Form 4562.

Property Acquired in a Nontaxable Transfer

You must depreciate MACRS property acquired by a corporation or partnership in certain nontaxable transfers over the property’s remaining recovery period in the transferor’s hands, as if the transfer had not occurred. You must continue to use the same depreciation method and convention as the transferor. You can depreciate the part of the property’s basis that exceeds its carryover basis (the transferor’s adjusted basis in the property) as newly purchased MACRS property.

The nontaxable transfers covered by this rule include the following.

• A distribution in complete liquidation of a subsidiary.

• A transfer to a corporation controlled by the transferor.

• An exchange of property solely for corporate stock or securities in a reorganization.

• A contribution of property to a partnership in exchange for a partnership interest.

• A partnership distribution of property to a partner.

You cannot use the MACRS percentage tables to determine depreciation for a short tax year. A short tax year is any tax year with less than 12 full months. This section discusses the rules for determining the depreciation deduction for property you place in service or dispose of in a short tax year. It also discusses the rules for determining depreciation when you have a short tax year during the

recovery period (other than the year the property is placed in service or disposed of).

For more information on figuring depreciation for a short tax year, see Revenue Procedure 89-15, 1989-1 C.B. 816.

Using the Applicable Convention in a Short Tax Year

The applicable convention establishes the date property is treated as placed in service and disposed of. Depreciation is allowable only for that part of the tax year the property is treated as in service. The recovery period begins on the placed in service date determined by applying the convention. The remaining recovery period at the beginning of the next tax year is the full recovery period less the part for which depreciation was allowable in the first tax year.

The following discussions explain how to use the applicable convention in a short tax year.

Mid-month convention. Under the mid-month convention, you always treat your property as placed in service or disposed of on the midpoint of the month it is placed in service or disposed of. You apply this rule without regard to your tax year.

Half-year convention. Under the half-year convention, you treat property as placed in service or disposed of on the midpoint of the tax year it is placed in service or disposed of.

First or last day of month. For a short tax year beginning on the first day of a month or ending on the last day of a month, the tax year consists of the number of months in the tax year. If the short tax year includes part of a month, you generally include the full month in the number of months in the tax year. You determine the midpoint of the tax year by dividing the number of months in the tax year by 2. For the half-year convention, you treat property as placed in service or disposed of on either the first day or the midpoint of a month.

For example, a short tax year that begins on June 20 and ends on December 31 consists of 7 months. You use only full months for this determination, so you treat the tax year as beginning on June 1 instead of June 20. The midpoint of the tax year is the middle of September (3 ¹ /2 months from the beginning of the tax year). You treat property as placed in service or disposed of on this midpoint.

Example. Tara Corporation, a calendar year taxpayer, was incorporated on March 15. For purposes of the half-year convention, it has a short tax year of 10 months, ending on December 31, 2025. During the short tax year, Tara placed property in service for which it uses the half-year convention. Tara treats this property as placed in service on the first day of the sixth month of the short tax year, or August 1, 2025.

Not on first or last day of month. For a short tax year not beginning on the first day of a month and not ending on the last day of a month, the tax year consists of the

44 Chapter 4 Figuring Depreciation Under MACRS Publication 946 (2025)

number of days in the tax year. You determine the midpoint of the tax year by dividing the number of days in the tax year by 2. For the half-year convention, you treat property as placed in service or disposed of on either the first day or the midpoint of a month. If the result of dividing the number of days in the tax year by 2 is not the first day or the midpoint of a month, you treat the property as placed in service or disposed of on the nearest preceding first day or midpoint of a month.

Mid-quarter convention. To determine if you must use the mid-quarter convention, compare the basis of property you place in service in the last 3 months of your tax year to that of property you place in service during the full tax year. The length of your tax year does not matter. If you have a short tax year of 3 months or less, use the mid-quarter convention for all applicable property you place in service during that tax year.

You treat property under the mid-quarter convention as placed in service or disposed of on the midpoint of the quarter of the tax year in which it is placed in service or disposed of. Divide a short tax year into 4 quarters and determine the midpoint of each quarter.

For a short tax year of 4 or 8 full calendar months, determine quarters on the basis of whole months. The midpoint of each quarter is either the first day or the midpoint of a month. Treat property as placed in service or disposed of on this midpoint.

To determine the midpoint of a quarter for a short tax year of other than 4 or 8 full calendar months, complete the following steps.

1. Determine the number of days in your short tax year.

2. Determine the number of days in each quarter by dividing the number of days in your short tax year by 4.

3. Determine the midpoint of each quarter by dividing the number of days in each quarter by 2.

If the result of (3) gives you a midpoint of a quarter that is on a day other than the first day or midpoint of a month, treat the property as placed in service or disposed of on the nearest preceding first day or midpoint of that month.

Example. Tara Corporation, a calendar year taxpayer, was incorporated and began business on March 15. It has a short tax year of 9 ¹ /2 months, ending on December 31. During December, it placed property in service for which it must use the mid-quarter convention. This is a short tax year of other than 4 or 8 full calendar months, so it must determine the midpoint of each quarter.

1. First, it determines that its short tax year beginning March 15 and ending December 31 consists of 292 days.

2. Next, it divides 292 by 4 to determine the length of each quarter, 73 days.

3. Finally, it divides 73 by 2 to determine the midpoint of each quarter, the 37th day.

The following table shows the quarters of Tara Corporation’s short tax year, the midpoint of each quarter, and the

date in each quarter that Tara must treat its property as placed in service.

Quarter Midpoint Placed in

Service

3/15 – 5/26 4/20 4/15

5/27 – 8/07 7/02 7/01

8/08 – 10/19 9/13 9/01

10/20 – 12/31 11/25 11/15

The last quarter of the short tax year begins on October 20, which is 73 days from December 31, the end of the tax year. The 37th day of the last quarter is November 25, which is the midpoint of the quarter. November 25 is not the first day or the midpoint of November, so Tara Corporation must treat the property as placed in service in the middle of November (the nearest preceding first day or midpoint of that month).

Property Placed in Service in a Short Tax Year

To figure your MACRS depreciation deduction for the short tax year, you must first determine the depreciation for a full tax year. You do this by multiplying your basis in the property by the applicable depreciation rate. Then, determine the depreciation for the short tax year. Do this by multiplying the depreciation for a full tax year by a fraction. The numerator (top number) of the fraction is the number of months (including parts of a month) the property is treated as in service during the tax year (applying the applicable convention). The denominator (bottom number) is 12. See Depreciation After a Short Tax Year, later, for information on how to figure depreciation in later years.

Example 1—half-year convention. Tara Corporation, with a short tax year beginning March 15 and ending December 31, placed in service on March 16 an item of 5-year property with a basis of $1,000. This is the only property the corporation placed in service during the short tax year. Tara does not elect to claim a section 179 deduction and the property does not qualify for a special depreciation allowance. The depreciation method for this property is the 200% declining balance method. The depreciation rate is 40% and Tara applies the half-year convention.

Tara treats the property as placed in service on August

1. The determination of this August 1 date is explained in the example illustrating the half-year convention under Us- ing the Applicable Convention in a Short Tax Year , earlier.

Tara is allowed 5 months of depreciation for the short tax year that consists of 10 months. The corporation first multiplies the basis ($1,000) by 40% (the declining balance rate) to get the depreciation for a full tax year of $400. The corporation then multiplies $400 by ⁵ /12 to get the short tax year depreciation of $167.

Example 2—mid-quarter convention. Tara Corporation, with a short tax year beginning March 15 and ending

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December 31, placed in service on October 16 an item of 5-year property with a basis of $1,000. Tara does not elect to claim a section 179 deduction and the property does not qualify for a special depreciation allowance. The depreciation method for this property is the 200% declining balance method. The depreciation rate is 40%. The corporation must apply the mid-quarter convention because the property was the only item placed in service that year and it was placed in service in the last 3 months of the tax year.

Tara treats the property as placed in service on September 1. This date is shown in the table provided in the example illustrating the mid-quarter convention under Us- ing the Applicable Convention in a Short Tax Year, earlier, for property that Tara Corporation placed in service during the quarter that begins on August 8 and ends on October 19. Under MACRS, Tara is allowed 4 months of depreciation for the short tax year that consists of 10 months. The corporation first multiplies the basis ($1,000) by 40% to get the depreciation for a full tax year of $400. The corporation then multiplies $400 by ⁴ /12 to get the short tax year depreciation of $133.

Property Placed in Service Before a Short Tax Year

If you have a short tax year after the tax year in which you began depreciating property, you must change the way you figure depreciation for that property. If you were using the percentage tables, you can no longer use them. You must figure depreciation for the short tax year and each later tax year as explained next.

Depreciation After a Short Tax Year

You can use either of the following methods to figure the depreciation for years after a short tax year.

• The simplified method.

• The allocation method.

You must use the method you choose consistently.

Using the simplified method for a 12-month year. Under the simplified method, you figure the depreciation for a later 12-month year in the recovery period by multiplying the adjusted basis of your property at the beginning of the year by the applicable depreciation rate.

Example. Assume the same facts as in Example 1 under Property Placed in Service in a Short Tax Year , earlier. Tara Corporation claimed depreciation of $167 for its short tax year. The adjusted basis on January 1 of the next year is $833 ($1,000 − $167). Tara’s depreciation for that next year is 40% of $833, or $333.

Using the simplified method for a short tax year. If a later tax year in the recovery period is a short tax year, you figure depreciation for that year by multiplying the adjusted basis of the property at the beginning of the tax year by the applicable depreciation rate, and then by a fraction. The fraction’s numerator is the number of months (including parts of a month) in the tax year. Its denominator is 12.

Using the simplified method for an early disposition. If you dispose of property in a later tax year before the end of the recovery period, determine the depreciation for the year of disposition by multiplying the adjusted basis of the property at the beginning of the tax year by the applicable depreciation rate and then multiplying the result by a fraction. The fraction’s numerator is the number of months (including parts of a month) the property is treated as in service during the tax year (applying the applicable convention). Its denominator is 12.

Using the allocation method for a 12-month or short tax year. Under the allocation method, you figure the depreciation for each later tax year by allocating to that year the depreciation attributable to the parts of the recovery years that fall within that year. Whether your tax year is a 12-month or short tax year, you figure the depreciation by determining which recovery years are included in that year. For each recovery year included, multiply the depreciation attributable to that recovery year by a fraction. The fraction’s numerator is the number of months (including parts of a month) that are included in both the tax year and the recovery year. Its denominator is 12. The allowable depreciation for the tax year is the sum of the depreciation figured for each recovery year.

Example. Assume the same facts as in Example 1 under Property Placed in Service in a Short Tax Year , earlier. Tara Corporation’s first tax year after the short tax year is a full year of 12 months, beginning January 1 and ending December 31. The first recovery year for the 5-year property placed in service during the short tax year extends from August 1 to July 31. Tara deducted 5 months of the first recovery year on its short-year tax return. Seven months of the first recovery year and 5 months of the second recovery year fall within the next tax year. The depreciation for the next tax year is $333, which is the sum of the following.

• $233—The depreciation for the first recovery year ($400 × ⁷ /12).

• $100—The depreciation for the second recovery year. This is figured by multiplying the adjusted basis of $600 ($1,000 − $400) by 40% (0.40), then multiplying the $240 result by ⁵ /12.

Using the allocation method for an early disposition. If you dispose of property before the end of the recovery period in a later tax year, determine the depreciation for the year of disposition by multiplying the depreciation figured for each recovery year (or part of a recovery year) included in the tax year by a fraction. The numerator of the fraction is the number of months (including parts of months) the property is treated as in service in the tax year (applying the applicable convention). The denominator is 12. If there is more than one recovery year in the tax year, you add together the depreciation for each recovery year.

46 Chapter 4 Figuring Depreciation Under MACRS Publication 946 (2025)

Terms you may need to know (see Glossary):

Adjusted basis Amortization Amount realized Basis Convention Disposition Exchange Placed in service Recovery period Section 1245 property Unadjusted basis

To make it easier to figure MACRS depreciation, you can group separate properties into one or more general asset accounts (GAAs). You can then depreciate all the properties in each account as a single item of property.

Property you cannot include. You cannot include property in a GAA if you use it in both a personal activity and a trade or business (or for the production of income) in the year in which you first place it in service. If property you included in a GAA is later used in a personal activity, see Terminating GAA Treatment, later.

Property generating foreign source income. For information on the GAA treatment of property that generates foreign source income, see sections 1.168(i)-1(c)(1)(ii) and 1.168(i)-1(f) of the regulations.

Change in use. Special rules apply to figuring depreciation for property in a GAA for which the use changes during the tax year. Examples include a change in use resulting in a shorter recovery period and/or a more accelerated depreciation method or a change in use resulting in a longer recovery period and/or a less accelerated depreciation method. See sections 1.168(i)-1(h) and 1.168(i)-4 of the regulations.

Each GAA must include only property you placed in service in the same tax year and that has the following in common.

• Recovery period.

• Depreciation method.

• Convention.

The following rules also apply when you establish a GAA.

• Mid-quarter convention. Property subject to the mid-quarter convention can only be grouped into a GAA with property placed in service in the same quarter of the tax year.

• Mid-month convention. Property subject to the mid-month convention can only be grouped into a GAA with property placed in service in the same month of the tax year.

• Passenger automobiles. Passenger automobiles subject to the limits on passenger automobile depreciation must be grouped into a separate GAA.

See section 1.168(i)-1(c)(2)(ii) of the regulations for additional rules that apply when you establish a GAA.

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

Example. Make & Sell, a calendar year corporation, set up a GAA for 10 machines. The machines cost a total of $10,000 and were placed in service in June 2025. One of the machines cost $8,200 and the rest cost a total of $1,800. This GAA is depreciated under the 200% declining balance method with a 5-year recovery period and a half-year convention. Make & Sell did not claim the section 179 deduction on the machines and the machines did not qualify for a special depreciation allowance. The depreciation allowance for 2025 is $2,000 [($10,000 × 40% (0.40)) ÷ 2]. As of January 1, 2026, the depreciation reserve account is $2,000.

Passenger automobiles. To figure depreciation on passenger automobiles in a GAA, apply the deduction limits discussed in chapter 5 under Do the Passenger Automo- bile Limits Apply . Multiply the amount determined using these limits by the number of automobiles originally inclu- ded in the account, reduced by the total number of automobiles removed from the GAA, as discussed under Ter- minating GAA Treatment, later.

When you dispose of property included in a GAA, the following rules generally apply.

• Neither the unadjusted depreciable basis (defined later) nor the depreciation reserve account of the GAA is affected. You continue to depreciate the account as if the disposition had not occurred.

• The property is treated as having an adjusted basis of zero, so you cannot realize a loss on the disposition. If the property is transferred to a supplies, scrap, or similar account, its basis in that account is zero.

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• Any amount realized on the disposition is treated as ordinary income, up to the limit discussed later under Treatment of amount realized.

However, these rules do not apply to any disposition described later under Terminating GAA Treatment.

Disposition. Property in a GAA is considered disposed of when you do any of the following.

• Permanently withdraw it from use in your trade or business or from the production of income.

• Transfer it to a supplies, scrap, or similar account.

• Sell, exchange, retire, physically abandon, or destroy it.

The retirement of a structural component of real property is not a disposition unless it is a partial disposition. See section 1.168(i)-1(e)(1) of the regulations.

Treatment of amount realized. When you dispose of property in a GAA, you must recognize any amount realized from the disposition as ordinary income, up to a limit. The limit is:

1. The unadjusted depreciable basis of the GAA, plus

2. Any expensed costs for property in the GAA that are subject to recapture as depreciation (not including any expensed costs for property that you removed from the GAA under the rules discussed later under Terminating GAA Treatment ), minus

3. Any amount previously recognized as ordinary income upon the disposition of other property from the GAA.

Unadjusted depreciable basis. The unadjusted depreciable basis of a GAA is the total of the unadjusted depreciable bases of all the property in the GAA. The unadjusted depreciable basis of an item of property in a GAA is the amount you would use to figure gain or loss on its sale, but figured without reducing your original basis by any depreciation allowed or allowable in earlier years. However, you do reduce your original basis by other amounts, including any amortization deduction, section 179 deduction, special depreciation allowance, and electric vehicle credit.

Expensed costs. Expensed costs that are subject to recapture as depreciation include the following.

1. The section 179 deduction.

2. Amortization deductions for the following.

a. Pollution control facilities.

b. Removal of barriers for the elderly and disabled.

c. Tertiary injectants.

d. Reforestation expenses.

Example 1. The facts are the same as in the example under Figuring Depreciation for a GAA, earlier. In February 2025, Make & Sell sells the machine that cost $8,200 to an unrelated person for $9,000. The machine is treated as having an adjusted basis of zero.

On its 2025 tax return, Make & Sell recognizes the $9,000 amount realized as ordinary income because it is not more than the GAA’s unadjusted depreciable basis ($10,000) plus any expensed cost (for example, the section 179 deduction) for property in the GAA ($0), minus any amounts previously recognized as ordinary income because of dispositions of other property from the GAA ($0).

The unadjusted depreciable basis and depreciation reserve of the GAA are not affected by the sale of the machine. The depreciation allowance for the GAA in 2025 is $3,200 [($10,000 − $2,000) × 40% (0.40)].

Example 2. Assume the same facts as in Example 1 . In June 2026, Make & Sell sells seven machines to an unrelated person for a total of $1,100. These machines are treated as having an adjusted basis of zero.

On its 2026 tax return, Make & Sell recognizes $1,000 as ordinary income. This is the GAA’s unadjusted depreciable basis ($10,000) plus the expensed costs ($0), minus the amount previously recognized as ordinary income ($9,000). The remaining amount realized of $100 ($1,100

• $1,000) is section 1231 gain (discussed in chapter 3 of Pub. 544).

The unadjusted depreciable basis and depreciation reserve of the GAA are not affected by the disposition of the machines. The depreciation allowance for the GAA in 2026 is $1,920 [($10,000 − $5,200) × 40% (0.40)].

You must remove the following property from a GAA.

• Property held by a partnership that terminates under section 708(b)(1).

• Property you dispose of in a nonrecognition transaction or an abusive transaction.

• Property you dispose of in a qualifying disposition or in a disposition of all the property in the GAA, if you choose to terminate GAA treatment.

• Property you dispose of in a like-kind exchange or an involuntary conversion.

• Property you change to personal use.

• Property for which you must recapture any allowable credit or deduction, such as the investment credit, the credit for qualified electric vehicles, the credit for alternative fuel vehicle refueling property, the section 179 deduction, or the deduction for clean-fuel vehicles and clean-fuel vehicle refueling property placed in service before 2006.

If you remove property from a GAA, you must make the following adjustments.

1. Reduce the unadjusted depreciable basis of the GAA by the unadjusted depreciable basis of the property as of the first day of the tax year in which the disposition, change in use, partnership technical termination, or recapture event occurs. You can use any reasonable method that is consistently applied to determine

48 Chapter 4 Figuring Depreciation Under MACRS Publication 946 (2025)

the unadjusted depreciable basis of the property you remove from a GAA.

2. Reduce the depreciation reserve account by the depreciation allowed or allowable for the property (computed in the same way as computed for the GAA) as of the end of the tax year immediately preceding the year in which the disposition, change in use, or recapture event occurs.

These adjustments have no effect on the recognition and character of prior dispositions subject to the rules discussed earlier under Disposing of GAA Property .

Nonrecognition transactions. If you dispose of GAA property in a nonrecognition transaction, you must remove it from the GAA. The following are nonrecognition transactions.

• The receipt by one corporation of property distributed in complete liquidation of another corporation.

• The transfer of property to a corporation solely in exchange for stock in that corporation if the transferor is in control of the corporation immediately after the exchange.

• The transfer of property by a corporation that is a party to a reorganization in exchange solely for stock and securities in another corporation that is also a party to the reorganization.

• The contribution of property to a partnership in exchange for an interest in the partnership.

• The distribution of property (including money) from a partnership to a partner.

• Any transaction between members of the same affiliated group during any year for which the group makes a consolidated return.

Rules for recipient (transferee). The recipient of the property (the person to whom it is transferred) must include your (the transferor’s) adjusted basis in the property in a GAA. If you transferred either all of the property, the last item of property, or the remaining portion of the last item of property, in a GAA, the recipient’s basis in the property is the result of the following.

• The adjusted depreciable basis of the GAA as of the beginning of your tax year in which the transaction takes place, minus

• The depreciation allowable to you for the year of the transfer.

For this purpose, the adjusted depreciable basis of a GAA is the unadjusted depreciable basis of the GAA minus any depreciation allowed or allowable for the GAA.

Abusive transactions. If you dispose of GAA property in an abusive transaction, you must remove it from the GAA. A disposition is an abusive transaction if it is not a nonrecognition transaction (described earlier) or a like-kind exchange or involuntary conversion and a main purpose for the disposition is to get a tax benefit or a result that would not be available without the use of a GAA. Examples of abusive transactions include the following.

1. A transaction with a main purpose of shifting income or deductions among taxpayers in a way that would not be possible without choosing to use a GAA to take advantage of differing effective tax rates.

2. A choice to use a GAA with a main purpose of disposing of property from the GAA so that you can use an expiring net operating loss or credit. For example, if you have a net operating loss carryover or a credit carryover, the following transactions will be considered abusive transactions unless there is strong evidence to the contrary.

a. A transfer of GAA property to a related person.

b. A transfer of GAA property under an agreement

where the property continues to be used, or is available for use, by you.

Figuring gain or loss. You must determine the gain, loss, or other deduction due to an abusive transaction by taking into account the property’s adjusted basis. The adjusted basis of the property at the time of the disposition is the result of the following.

• The unadjusted depreciable basis of the property, mi- nus

• The depreciation allowed or allowable for the property figured by using the depreciation method, recovery period, and convention that applied to the GAA in which the property was included.

If there is a gain, the amount subject to recapture as ordinary income is the smaller of the following.

1. The depreciation allowed or allowable for the property, including any expensed cost (such as section 179 deductions) or the special depreciation allowance for the property.

2. The result of the following.

a. The original unadjusted depreciable basis of the

GAA (plus, for section 1245 property originally included in the GAA, any expensed cost), minus

b. The total gain previously recognized as ordinary

income on the disposition of property from the GAA.

Qualifying dispositions. If you dispose of GAA property in a qualifying disposition, you can choose to remove the property from the GAA. A qualifying disposition is one that does not involve all the property, or the last item of property, remaining in a GAA and that is described by any of the following.

1. A disposition that is a direct result of fire, storm, shipwreck, other casualty, or theft.

2. A charitable contribution for which a deduction is allowed.

3. A disposition that is a direct result of a cessation, termination, or disposition of a business, manufacturing or other income-producing process, operation, facility, plant, or other unit (other than by transfer to a supplies, scrap, or similar account).

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4. A nontaxable transaction other than a nonrecognition transaction (described earlier), a like-kind exchange or involuntary conversion, a technical termination of a partnership, or a transaction that is nontaxable only because it is a disposition from a GAA.

If you choose to remove the property from the GAA, figure your gain, loss, or other deduction resulting from the disposition in the manner described earlier under Abusive transactions .

Like-kind exchanges and involuntary conversions. If you dispose of GAA property as a result of a like-kind exchange or involuntary conversion, you must remove from the GAA the property that you transferred. See chapter 1 of Pub. 544 for information on these transactions. Figure your gain, loss, or other deduction resulting from the disposition in the manner described earlier under Abusive transactions .

Example. Sankofa, a calendar year corporation, maintains one GAA for 12 machines. Each machine costs $15,000 and was placed in service in 2023. Of the 12 machines, nine cost a total of $135,000 and are used in Sankofa’s New York plant and three machines cost $45,000 and are used in Sankofa’s New Jersey plant. Assume this GAA uses the 200% declining balance method, a 5-year recovery period, and a half-year convention. Sankofa does not claim the section 179 deduction and the machines do not qualify for a special depreciation allowance. As of January 1, 2025, the depreciation reserve account for the GAA is $93,600.

In May 2025, Sankofa sells its entire manufacturing plant in New Jersey to an unrelated person. The sales proceeds allocated to each of the three machines at the New Jersey plant is $5,000. This transaction is a qualifying disposition, so Sankofa chooses to remove the three machines from the GAA and figure the gain, loss, or other deduction by taking into account their adjusted bases.

For Sankofa’s 2025 return, the depreciation allowance for the GAA is figured as follows. As of December 31, 2024, the depreciation allowed or allowable for the three machines at the New Jersey plant is $23,400. As of January 1, 2025, the unadjusted depreciable basis of the GAA is reduced from $180,000 to $135,000 ($180,000 minus the $45,000 unadjusted depreciable bases of the three machines), and the depreciation reserve account is decreased from $93,600 to $70,200 ($93,600 minus $23,400 depreciation allowed or allowable for the three machines as of December 31, 2024). The depreciation allowance for the GAA in 2025 is $25,920 [($135,000 − $70,200) × 40% (0.40)].

For Sankofa’s 2025 return, gain or loss for each of the three machines at the New Jersey plant is determined as follows. The depreciation allowed or allowable in 2025 for each machine is $1,440 [(($15,000 − $7,800) × 40% (0.40)) ÷ 2]. The adjusted basis of each machine is $5,760 (the adjusted depreciable basis of $7,200 removed from the account less the $1,440 depreciation allowed or allowable in 2025). As a result, the loss recognized in 2025 for

each machine is $760 ($5,760 − $5,000). This loss is subject to section 1231 treatment. See chapter 3 of Pub. 544 for information on section 1231 losses.

Disposition of all property in a GAA. If you dispose of all the property, or the last item of property, in a GAA, you can choose to end the GAA. If you make this choice, you figure the gain or loss by comparing the adjusted depreciable basis of the GAA with the amount realized.

If there is a gain, the amount subject to recapture as ordinary income is limited to the result of the following.

• The depreciation allowed or allowable for the GAA, including any expensed cost (such as section 179 deductions or the additional depreciation allowed or allowable for the GAA), minus

• The total gain previously recognized as ordinary income on the disposition of property from the GAA.

Like-kind exchanges and involuntary conversions. If you dispose of all the property or the last item of property in a GAA as a result of a like-kind exchange or involuntary conversion, the GAA terminates. You must figure the gain or loss in the manner described above under Dis- position of all property in a GAA .

Example. Duforcelf, a calendar year corporation, maintains a GAA for 1,000 calculators that cost a total of $60,000 and were placed in service in 2022. Assume this GAA is depreciated under the 200% declining balance method, has a recovery period of 5 years, and uses a half-year convention. Duforcelf does not claim the section 179 deduction and the calculators do not qualify for a special depreciation allowance. In 2024, Duforcelf sells 200 of the calculators to an unrelated person for $10,000. The $10,000 is recognized as ordinary income.

In March 2025, Duforcelf sells the remaining calculators in the GAA to an unrelated person for $35,000. Duforcelf decides to end the GAA.

On the date of the disposition, the adjusted depreciable basis of the account is $23,040 (unadjusted depreciable basis of $60,000 minus the depreciation allowed or allowable of $36,960). In 2025, Duforcelf recognizes a gain of $11,960. This is the amount realized of $35,000 minus the adjusted depreciable basis of $23,040. The gain subject to recapture as ordinary income is limited to the depreciation allowed or allowable minus the amounts previously recognized as ordinary income ($36,960 − $10,000 = $26,960). Therefore, the entire gain of $11,960 is recaptured as ordinary income.

An election to include property in a GAA is made separately by each owner of the property. This means that an election to include property in a GAA must be made by each member of a consolidated group and at the partnership or S corporation level (and not by each partner or shareholder separately).

How to make the election. Make the election by completing line 18 of Form 4562.

50 Chapter 4 Figuring Depreciation Under MACRS Publication 946 (2025)

When to make the election. You must make the election on a timely filed tax return (including extensions) for the year in which you place in service the property included in the GAA. However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Attach the election to the amended return and write “Filed pursuant to section 301.9100-2” on the election statement.

Records you should keep. You must maintain records that identify the property included in each GAA, that establish the unadjusted depreciable basis and depreciation reserve of the GAA, and that reflect the amount realized during the year upon dispositions from each GAA. However, see chapter 2 for the recordkeeping requirements for section 179 property.

Revoking an election. You can revoke an election to use a GAA only in the following situations.

• You include in the GAA property that generates foreign source income both U.S. and foreign source income, or combined gross income of a foreign sales corporation, a domestic international sales corporation, or a possessions corporation and its related supplier, and that inclusion results in a substantial distortion of income.

• You remove property from the GAA, as described under Terminating GAA Treatment, earlier.

Terms you may need to know (see Glossary):

Disposition Nonresidential real property Recapture Residential rental property

When you dispose of property that you depreciated using MACRS, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the depreciation previously allowed or allowable for the property. Depreciation, for this purpose, includes the following.

• Any section 179 deduction claimed on the property.

• Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur regulations.

• Any deduction under section 179C of the Internal Revenue Code for certain qualified refinery property

placed in service after August 8, 2005, and before January 1, 2014.

• Any deduction under section 179D of the Internal Revenue Code for certain energy efficient commercial building property placed in service after December 31,

• Any deduction under section 179E of the Internal Revenue Code for qualified advanced mine safety equipment property placed in service after December 20, 2006, and before January 1, 2018.

• Any deduction under section 190 of the Internal Revenue Code for removal of barriers to the disabled and the elderly.

• Any deduction under section 193 of the Internal Revenue Code for tertiary injectants.

• Any special depreciation allowance previously allowed or allowable for the property (unless you elected not to claim it).

There is no recapture for residential rental and nonresidential real property unless that property is qualified property for which you claimed a special depreciation allowance. For more information on depreciation recapture, see Pub. 544.

This chapter discusses the deduction limits and other special rules that apply to certain listed property. Listed property includes cars, business aircraft, and other property used for transportation, property used for entertainment, and certain computers.

Deductions for listed property (other than certain leased property) are subject to the following special rules and limits.

• Deduction for employees. If your use of the property is not for your employer’s convenience or is not required as a condition of your employment, you cannot deduct depreciation or rent expenses for your use of the property as an employee.

• Business-use requirement. If the property is not used predominantly (more than 50%) for qualified business use, you cannot claim the section 179 deduction or a special depreciation allowance. For business aircraft, there is also a 25% test that must be met. In addition, you must figure any depreciation deduction under MACRS using the straight line

Publication 946 (2025) Chapter 5 Additional Rules for Listed Property 51

method over the ADS recovery period. You may also have to recapture (include in income) any excess depreciation claimed in previous years. A similar inclusion amount applies to certain leased property.

• Passenger automobile limits and rules. Annual limits apply to depreciation deductions (including section 179 deductions and any special depreciation allowance) for certain passenger automobiles. You can continue to deduct depreciation for the unrecovered basis resulting from these limits after the end of the recovery period.

This chapter defines listed property and explains the special rules and depreciation deduction limits that apply, including the special inclusion amount rule for leased property. It also discusses the recordkeeping rules for listed property and explains how to report information about the property on your tax return.

Useful Items You may want to see:

Publication

463

587

463 Travel, Gift, and Car Expenses

587 Business Use of Your Home

Form (and Instructions)

2106

4562

4797

2106 Employee Business Expenses

4562 Depreciation and Amortization

4797 Sales of Business Property

See How To Get Tax Help at the end of this publication for information about getting publications and forms.

Terms you may need to know (see Glossary):

Capitalized Commuting Improvement Recovery period Straight line method

Listed property is any of the following.

• Passenger automobiles (as defined later).

• Business aircraft (discussed later).

• Any other property used for transportation, unless it is an excepted vehicle.

• Property generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video recording equipment).

Improvements to listed property. An improvement made to listed property that must be capitalized is treated as a new item of depreciable property. The recovery period and method of depreciation that apply to the listed property as a whole also apply to the improvement. For example, if you must depreciate the listed property using the straight line method, you must also depreciate the improvement using the straight line method.

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

The following vehicles are not considered passenger automobiles for these purposes.

• An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business.

• A vehicle used directly in the trade or business of transporting persons or property for pay or hire.

• A truck or van that is a qualified nonpersonal use vehicle.

Qualified nonpersonal use vehicles. Qualified nonpersonal use vehicles are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes. They include the trucks and vans listed as excepted vehicles under Other Property Used for Transpor- tation next. They also include trucks and vans that have been specially modified so that they are not likely to be used more than a minimal amount for personal purposes, such as by installation of permanent shelving and painting the vehicle to display advertising or the company’s name.

For a detailed discussion of passenger automobiles, including leased passenger automobiles, see Pub. 463.

A business aircraft may be depreciated using straight line depreciation over its useful life. Business aircraft may also be eligible for accelerated depreciation including the section 179 election deduction, the special depreciation allowance, and MACRS which allows the aircraft owner to immediately expense a portion of the aircraft if certain tests are met. These tests are based on the qualified business use of the aircraft.

Qualified business-use tests. Qualified business use is defined as any use in a trade or business. To claim accelerated depreciation on business aircraft, you must meet the 50% test under section 280F(b) of the Internal Revenue Code and the 25% test under section 280F(d)(6)(C) (ii) of the Internal Revenue Code. Failure to meet either of these tests disqualifies the aircraft from claiming

52 Chapter 5 Additional Rules for Listed Property Publication 946 (2025)

accelerated depreciation, including the special depreciation allowance. Qualified business use is determined on a flight-by-flight basis and each passenger on every flight leg must be classified as qualified business or non-qualified business use. You must also maintain contemporaneous records to substantiate the following.

• The amount of the aircraft expense.

• Time and place of travel.

• Business purpose of the travel.

• Business relationship of each individual using the aircraft.

See sections 280F(b) and 280F(d)(6)(C)(ii) of the Internal Revenue Code.

Note: If you claimed accelerated depreciation on a business aircraft and fail to meet either the 25% or 50% qualified business-use tests at any time during the class life for the aircraft, then the aircraft is placed on straight line depreciation. You must also recapture, as ordinary income, the excess depreciation claimed using accelerated depreciation in prior years over the amount which would have been allowable for the aircraft using the straight line method of depreciation under ADS.

Caution: Although vehicles used to transport persons or property for pay or hire and vehicles rated at more than the 6,000-pound threshold are not passenger automobiles, they are still “other property used for transportation” and are subject to the special rules for listed property.

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

Excepted vehicles. Other property used for transportation does not include the following qualified nonpersonal use vehicles (defined earlier under Passenger Automo- biles ).

• Clearly marked police and fire vehicles.

• Unmarked vehicles used by law enforcement officers if the use is officially authorized.

• Ambulances used as such and hearses used as such.

• Any vehicle with a loaded gross vehicle weight of over 14,000 pounds that is designed to carry cargo.

• Bucket trucks (cherry pickers), cement mixers, dump trucks (including garbage trucks), flatbed trucks, and refrigerated trucks.

• Combines, cranes and derricks, and forklifts.

• Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat.

• Qualified moving vans.

• Qualified specialized utility repair trucks.

• School buses used in transporting students and employees of schools.

• Other buses with a capacity of at least 20 passengers that are used as passenger buses.

• Tractors and other special purpose farm vehicles.

Clearly marked police or fire vehicle. A clearly marked police or fire vehicle is a vehicle that meets all the following requirements.

• It is owned or leased by a governmental unit or an agency or instrumentality of a governmental unit.

• It is required to be used for commuting by a police officer or firefighter who, when not on a regular shift, is on call at all times.

• It is prohibited from being used for personal use (other than commuting) outside the limit of the police officer’s arrest powers or the firefighter’s obligation to respond to an emergency.

• It is clearly marked with painted insignia or words that make it readily apparent that it is a police or fire vehicle. A marking on a license plate is not a clear marking for these purposes.

Qualified moving van. A qualified moving van is any truck or van used by a professional moving company for moving household or business goods if the following requirements are met.

• No personal use of the van is allowed other than for travel to and from a move site or for minor personal use, such as a stop for lunch on the way from one move site to another.

• Personal use for travel to and from a move site happens no more than five times a month on average.

• Personal use is limited to situations in which it is more convenient to the employer, because of the location of the employee’s residence in relation to the location of the move site, for the van not to be returned to the employer’s business location.

Qualified specialized utility repair truck. A truck is a qualified specialized utility repair truck if it is not a van or pickup truck and all the following apply.

• The truck was specifically designed for and is used to carry heavy tools, testing equipment, or parts.

• Shelves, racks, or other permanent interior construction has been installed to carry and store the tools, equipment, or parts and would make it unlikely that the truck would be used, other than minimally, for personal purposes.

• The employer requires the employee to drive the truck home in order to be able to respond in emergency situations for purposes of restoring or maintaining electricity, gas, telephone, water, sewer, or steam utility services.

Publication 946 (2025) Chapter 5 Additional Rules for Listed Property 53

If you are an employee, you can claim a depreciation deduction for the use of your listed property (whether owned or rented) in performing services as an employee only if your use is a business use. The use of your property in performing services as an employee is a business use only if both the following requirements are met.

• The use is for your employer’s convenience.

• The use is required as a condition of your employment.

If these requirements are not met, you cannot deduct depreciation (including the section 179 deduction) or rent expenses for your use of the property as an employee.

Note: Employee expenses for transportation and for the depreciation of certain listed property (such as computers placed in service before 2018) paid or incurred in a tax year beginning after December 31, 2017, and before January 1, 2026, may not be claimed as a miscellaneous itemized deduction subject to the 2% floor. If you are not entitled to claim these expenses as an above-the-line deduction, you may not claim a deduction for the expense on your 2025 return.

Employer’s convenience. Whether the use of listed property is for your employer’s convenience must be determined from all the facts. The use is for your employer’s convenience if it is for a substantial business reason of the employer. The use of listed property during your regular working hours to carry on your employer’s business is generally for the employer’s convenience.

Condition of employment. Whether the use of listed property is a condition of your employment depends on all the facts and circumstances. The use of property must be required for you to perform your duties properly. Your employer does not have to require explicitly that you use the property. However, a mere statement by the employer that the use of the property is a condition of your employment is not sufficient.

Example 1. Virginia Sycamore is employed as a courier with We Deliver, which provides local courier services. Virginia owns and uses a motorcycle to deliver packages to downtown offices. We Deliver explicitly requires all delivery persons to own a car or motorcycle for use in their employment. Virginia’s use of the motorcycle is for the convenience of We Deliver and is required as a condition of employment.

Example 2. You are an inspector for Uplift, a construction company with many sites in the local area. You must travel to these sites on a regular basis. Uplift does not furnish an automobile or explicitly require you to use your own automobile. However, it pays you for any costs you incur in traveling to the various sites. The use of your own

automobile or a rental automobile is for the convenience of Uplift and is required as a condition of employment.

Example 3. Assume the same facts as in Example 2, except that Uplift furnishes a car to you, and you choose to use your own car and receive payment for using it. The use of your own car is neither for the convenience of Uplift nor required as a condition of employment.

Example 4. Marilyn Lee is a pilot for Y Company, a small charter airline. Y requires pilots to obtain 80 hours of flight time annually in addition to flight time spent with the airline. Pilots can usually obtain these hours by flying with the Air Force Reserve or by flying part-time with another airline. Marilyn owns an airplane. The use of that airplane to obtain the required flight hours is neither for the convenience of the employer nor required as a condition of employment.

Example 5. David Rule is employed as an engineer with Zip, an engineering contracting firm. David occasionally takes work home at night rather than work late in the office. David owns and uses a home computer, which is virtually identical to the office model. David’s use of the computer is neither for the convenience of David’s employer nor required as a condition of employment.

Terms you may need to know (see Glossary):

Adjusted basis Business/investment use Capitalized Commuting Declining balance method Fair market value (FMV) Nonresidential real property Placed in service Recapture Recovery period Straight line method

You can claim the section 179 deduction and a special depreciation allowance for listed property and depreciate listed property using GDS and a declining balance method if the property meets the business-use requirement. To meet this requirement, listed property must be used predominantly (more than 50% of its total use) for qualified

54 Chapter 5 Additional Rules for Listed Property Publication 946 (2025)

business use. There is also a 25% test for business aircraft (discussed earlier). If this requirement is not met, the following rules apply.

• Property not used predominantly for qualified business use during the year it is placed in service does not qualify for the section 179 deduction.

• Property not used predominantly for qualified business use during the year it is placed in service does not qualify for a special depreciation allowance.

• Any depreciation deduction under MACRS for property not used predominantly for qualified business use during any year must be figured using the straight line method over the ADS recovery period. This rule applies each year of the recovery period.

• Excess depreciation on property previously used predominantly for qualified business use must be recaptured (included in income) in the first year in which it is no longer used predominantly for qualified business use.

• A lessee must add an inclusion amount to income in the first year in which the leased property is not used predominantly for qualified business use.

Caution: Being required to use the straight line method for an item of listed property not used predominantly for qualified business use 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.

Exception for leased property. The business-use requirement generally does not apply to any listed property leased or held for leasing by anyone regularly engaged in the business of leasing listed property.

You are considered regularly engaged in the business of leasing listed property only if you enter into contracts for the leasing of listed property with some frequency over a continuous 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 your business in its entirety. Occasional or incidental leasing activity is insufficient. For example, if you lease only one passenger automobile during a tax year, you are not regularly engaged in the business of leasing automobiles. An employer who allows an employee to use 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.

To determine whether the business-use requirement is met, you must allocate the use of any item of listed property used for more than one purpose during the year among its various uses.

For passenger automobiles and other means of transportation, allocate the property’s use on the basis of mileage. You determine the percentage of qualified business use by dividing the number of miles you drove the vehicle

for business purposes during the year by the total number of miles you drove the vehicle for all purposes (including business miles) during the year.

For other listed property, allocate the property’s use on the basis of the most appropriate unit of time the property is actually used (rather than merely being available for use). For example, you can determine the percentage of business use of an item of listed property by dividing the number of hours you used the item of listed property for business purposes during the year by the total number of hours you used the item of listed property for all purposes (including business use) during the year.

Entertainment use. Treat the use of listed property for entertainment, recreation, or amusement purposes as a business use only to the extent you can deduct expenses (other than interest and property tax expenses) due to its use as an ordinary and necessary business expense.

Commuting use. The use of an automobile for commuting is not business use, regardless of whether work is performed during the trip. For example, a business telephone call made on a car telephone while commuting to work does not change the character of the trip from commuting to business. This is also true for a business meeting held in a car while commuting to work. Similarly, a business call made on an otherwise personal trip does not change the character of a trip from personal to business. The fact that an automobile is used to display material that advertises the owner’s or user’s trade or business does not convert an otherwise personal use into business use.

Use of your automobile by another person. If someone else uses your automobile, do not treat that use as business use unless one of the following conditions applies.

1. That use is directly connected with your business.

2. You properly report the value of the use as income to the other person and withhold tax on the income where required.

3. You are paid a fair market rent.

Treat any payment to you for the use of the automobile as a rent payment for purposes of item (3).

Employee deductions. If you are an employee, do not treat your use of listed property as business use unless it is for your employer’s convenience and is required as a condition of your employment. See Can Employees Claim a Deduction, earlier.

Qualified business use of listed property is any use of the property in your trade or business. However, it does not include the following uses.

• The leasing of property to any 5% owner or related person (to the extent the property is used by a 5% owner or person related to the owner or lessee of the property).

Publication 946 (2025) Chapter 5 Additional Rules for Listed Property 55

• The use of property as pay for the services of a 5% owner or related person.

• The use of property as pay for services of any person (other than a 5% owner or related person), unless the value of the use is included in that person’s gross income and income tax is withheld on that amount where required.

Caution: Property does not stop being used predominantly for qualified business use because of a transfer at death.

Exception for leasing or compensatory use of air- craft. Treat the leasing of any aircraft by a 5% owner or related person, or the compensatory use of any aircraft, as a qualified business use if at least 25% of the total use of the aircraft during the year is for a qualified business use. If the 25% test is not met, you cannot take accelerated depreciation

For business aircraft, allocate the use based on mileage or hours on a per-passenger basis for the year. This can be done using the flight-by-flight method or the occupied-seat method computations.

5% owner. For a business entity that is not a corporation, a 5% owner is any person who owns more than 5% of the capital or profits interest in the business.

For a corporation, a 5% owner is any person who owns, or is considered to own, either of the following.

• More than 5% of the outstanding stock of the corporation.

• Stock possessing more than 5% of the total combined voting power of all stock in the corporation.

Related persons. For a description of related persons, see Related persons in the discussion on property owned or used in 1986 under What Method Can You Use To De- preciate Your Property? in chapter 1. For this purpose, however, treat as related persons only the relationships listed in items (1) through (10) of that discussion and substitute “50%” for “10%” each place it appears.

Examples. The following examples illustrate whether the use of business property is qualified business use.

Example 1. John Maple is the sole proprietor of a plumbing contracting business. Richard, John’s sibling, is employed by John in the business. As part of Richard’s pay, Richard is allowed to use one of the company automobiles for personal use. The company includes the value of the personal use of the automobile in Richard’s gross income and properly withholds tax on it. The use of the automobile is pay for the performance of services by a related person, so it is not a qualified business use.

Example 2. John, in Example 1, allows unrelated employees to use company automobiles for personal purposes. John does not include the value of the personal use of the company automobiles as part of their compensation and does not withhold tax on the value of the use of the

automobiles. This use of company automobiles by employees is not a qualified business use.

Example 3. James Company Inc. owns several automobiles that its employees use for business purposes. The employees are also allowed to take the automobiles home at night. The FMV of each employee’s use of an automobile for any personal purpose, such as commuting to and from work, is reported as income to the employee and James Company withholds tax on it. This use of company automobiles by employees, even for personal purposes, is a qualified business use for the company.

Investment Use

The use of property to produce income in a nonbusiness activity (investment use) is not a qualified business use. However, you can treat the investment use as business use to figure the depreciation deduction for the property in a given year.

Example 1. You use an item of listed property 50% of the time to manage your investments. You also use the item of listed property 40% of the time in your part-time consumer research business. Your item of listed property is listed property because it is not used at a regular business establishment. You do not use the item of listed property predominantly for qualified business use. Therefore, you cannot elect a section 179 deduction or claim a special depreciation allowance for the item of listed property. You must depreciate it using the straight line method over the ADS recovery period. Your combined business/ investment use for determining your depreciation deduction is 90%.

Example 2. If you use your item of listed property 30% of the time to manage your investments and 60% of the time in your consumer research business, it is used predominantly for qualified business use. You can elect a section 179 deduction and, if you do not deduct all the item of listed property’s cost, you can claim a special depreciation allowance and depreciate the item of listed property using the 200% declining balance method over the GDS recovery period. Your combined business/investment use for determining your depreciation deduction is 90%.

If you used listed property more than 50% in a qualified business use in the year you placed it in service, you must recapture (include in income) excess depreciation in the first year you use it 50% or less. You also increase the adjusted basis of your property by the same amount.

Excess depreciation is:

1. The depreciation allowable for the property (including any section 179 deduction and special depreciation allowance claimed) for years before the first year you do not use the property predominantly for qualified business use, minus

56 Chapter 5 Additional Rules for Listed Property Publication 946 (2025)

2. The depreciation that would have been allowable for those years if you had not used the property predominantly for qualified business use in the year you placed it in service.

To determine the amount in (2) above, you must refigure the depreciation using the straight line method and the ADS recovery period.

Example. In June 2021, Ellen Rye purchased and placed in service a pickup truck that cost $18,000. Ellen used it only for qualified business use for 2021 through 2024. Ellen claimed a section 179 deduction of $10,000 based on the purchase of the truck. Ellen began depreciating it using the 200% DB method over a 5-year GDS recovery period. The pickup truck’s gross vehicle weight was over 6,000 pounds, so it was not subject to the passenger automobile limits discussed later under Do the Passenger Automobile Limits Apply. During 2025, Ellen used the truck 50% for business and 50% for personal purposes. Ellen includes $4,018 excess depreciation in her gross income for 2025. The excess depreciation is determined as follows.

Total section 179 deduction ($10,000) and

depreciation claimed ($6,618) for 2021 through 2024. (Depreciation is from Table A-1.) . . . . . . . $16,618

Minus: Depreciation allowable (Table

A-8):

2021—10% of $18,000 . . . . . . . . . . . $1,800 2022—20% of $18,000 . . . . . . . . . . . 3,600 2023—20% of $18,000 . . . . . . . . . . . 3,600 2024—20% of $18,000 . . . . . . . . . . . 3,600 12,600

Excess depreciation . . . . . . . . . . . . . . . . . . . . . $4,018

If Ellen’s use of the truck does not change to 50% for business and 50% for personal purposes until 2027, there will be no excess depreciation. The total depreciation allowable using Table A-8 through 2027 will be $18,000, which equals the total of the section 179 deduction and depreciation Ellen will have claimed.

Where to figure and report recapture. Use Form 4797, Part IV, to figure the recapture amount. Report the recapture amount as other income on the same form or schedule on which you took the depreciation deduction. For example, report the recapture amount as other income on Schedule C (Form 1040) if you took the depreciation deduction on Schedule C. If you took the depreciation deduction on Form 2106, report the recapture amount as other income on Schedule 1 (Form 1040), line 8z.

If you use leased listed property other than a passenger automobile for business/investment use, you must include an amount in your income in the first year your qualified business-use percentage is 50% or less. Your qualified business-use percentage is the part of the property’s total use that is qualified business use (defined earlier). For the

inclusion amount rules for a leased passenger automobile, see Leasing a Car in chapter 4 of Pub. 463.

The inclusion amount is the sum of Amount A and Amount B, described next. However, see the special rules for the inclusion amount, later, if your lease begins in the last 9 months of your tax year or is for less than 1 year.

Amount A. Amount A is:

1. The FMV of the property, multiplied by

2. The business/investment use for the first tax year the qualified business-use percentage is 50% or less, multiplied by

3. The applicable percentage from Table A-19 in Appen-

dix A.

The FMV of the property is the value on the first day of the lease term. If the capitalized cost of an item of listed property is specified in the lease agreement, you must treat that amount as the FMV.

Amount B. Amount B is:

1. The FMV of the property, multiplied by

2. The average of the business/investment use for all tax years the property was leased that precede the first tax year the qualified business-use percentage is 50% or less, multiplied by

3. The applicable percentage from Table A-20 in Appen-

dix A.

Maximum inclusion amount. The inclusion amount cannot be more than the sum of the deductible amounts of rent for the tax year in which the lessee must include the amount in gross income.

Inclusion amount worksheet. The following worksheet is provided to help you figure the inclusion amount for leased listed property.

Inclusion Amount Worksheet

for Leased Listed Property

Keep for Your Records

1. Fair market value . . . . . . . . . . . . . . . . . . . . . . .
2. Business/investment use for first year business use is 50% or less . . . . . . . . . . . . .
3. Multiply line 1 by line 2 . . . . . . . . . . . . . . . . . .
4. Rate (%) from Table A-19 . . . . . . . . . . . . . . .
5. Multiply line 3 by line 4. This is Amount A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6. Fair market value . . . . . . . . . . . . . . . . . . . . . . .
7. Average business/investment use for years property leased before the first year business use is 50% or less . . . . . . . . . . . . .
8. Multiply line 6 by line 7 . . . . . . . . . . . . . . . . . .
9. Rate (%) from Table A-20 . . . . . . . . . . . . . . .

Publication 946 (2025) Chapter 5 Additional Rules for Listed Property 57

10. Multiply line 8 by line 9. This is Amount B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11. Add line 5 and line 10. This is your inclusion amount. Enter here and as other income on the form or schedule on which you originally took the deduction (for example, Schedule C or F (Form 1040), Schedule 1 (Form 1040), Form 1120, etc.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Example. On February 1, 2023, Larry House, a calendar year taxpayer, leased and placed in service an item of listed property with an FMV of $3,000. The lease is for a period of 5 years. Larry does not use the item of listed property at a regular business establishment, so it is listed property. Larry’s business use of the property (all of which is qualified business use) is 80% in 2023, 60% in 2024, and 40% in 2025. Larry must add an inclusion amount to gross income for 2025, the first tax year Larry’s qualified business-use percentage is 50% or less. The item of listed property has a 5-year recovery period under both GDS and ADS. 2025 is the third tax year of the lease, so the applicable percentage from Table A-19 is −19.8%. The applicable percentage from Table A-20 is 22%. Larry’s deductible rent for the item of listed property for 2025 is $800.

Larry uses the inclusion amount worksheet to figure the amount that must be included in income for 2025. Larry’s inclusion amount is $224, which is the sum of −$238 (Amount A) and $462 (Amount B).

11. Add line 5 and line 10. This is your inclusion amount. Enter here and as other income on the form or schedule on which you originally took the deduction (for example, Schedule C or F (Form 1040), Schedule 1 (Form 1040), Form 1120, etc.) . . . . . . . . . . . . . . . . . . . . . $224

Lease beginning in the last 9 months of your tax year. The inclusion amount is subject to a special rule if all the following apply.

• The lease term begins within 9 months before the close of your tax year.

• You do not use the property predominantly (more than 50%) for qualified business use during that part of the tax year.

• The lease term continues into your next tax year.

Under this special rule, add the inclusion amount to income in the next tax year. Figure the inclusion amount by taking into account the average of the business/investment use for both tax years (line 2 of the Inclusion Amount Worksheet for Leased Listed Property) and the applicable percentage for the tax year the lease term begins. Skip lines 6 through 9 of the worksheet and enter zero on line 10.

Example 1. On August 1, 2024, Julie Rule, a calendar year taxpayer, leased and placed in service an item of listed property. The property is 5-year property with an FMV of $10,000. Julie’s property has a recovery period of 5 years under ADS. The lease is for 5 years. Julie’s business use of the property was 50% in 2024 and 90% in 2025. Julie paid rent of $3,600 for 2024, of which $3,240 is deductible. Julie must include $147 in income in 2025. The $147 is the sum of Amount A and Amount B. Amount A is $147 ($10,000 × 70% (0.70) × 2.1% (0.021)), the product of the FMV, the average business use for 2024 and 2025, and the applicable percentage for year 1 from Table A-19. Amount B is zero.

Lease for less than 1 year. A special rule for the inclusion amount applies if the lease term is less than 1 year and you do not use the property predominantly (more than 50%) for qualified business use. The amount included in income is the inclusion amount (figured as described in the preceding discussions) multiplied by a fraction. The numerator of the fraction is the number of days in the lease term, and the denominator is 365 (or 366 for leap years).

The lease term for listed property includes options to renew. If you have 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, treat them as one lease.

Example 2. On October 1, 2024, John Joyce, a calendar year taxpayer, leased and placed in service an item of listed property that is 3-year property. This property had

Inclusion Amount Worksheet

for Leased Listed Property

Keep for Your Records

1. Fair market value . . . . . . . . . . . . . . . . . . . . . $3,000

2. Business/investment use for first year business use is 50% or less . . . . . . . . . . . 40%

3. Multiply line 1 by line 2 . . . . . . . . . . . . . . . . 1,200

4. Rate (%) from Table A-19 . . . . . . . . . . . . . −19.8%

5. Multiply line 3 by line 4. This is Amount A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −238

6. Fair market value . . . . . . . . . . . . . . . . . . . . . 3,000

7. Average business/investment use for years property leased before the first year business use is 50% or less . . . . . . 70%

8. Multiply line 6 by line 7 . . . . . . . . . . . . . . . . 2,100

9. Rate (%) from Table A-20 . . . . . . . . . . . . . 22.0%

10. Multiply line 8 by line 9. This is Amount B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462

58 Chapter 5 Additional Rules for Listed Property Publication 946 (2025)

an FMV of $15,000 and a recovery period of 5 years under ADS. The lease term was 6 months (ending on March 31, 2025), during which John used the property 45% in business. John must include $71 in income in 2025. The $71 is the sum of Amount A and Amount B. Amount A is $71 ($15,000 × 45% (0.45) × 2.1% (0.021) × 183/365), the product of the FMV, the average business use for both years, and the applicable percentage for year 1 from Table A-19, prorated for the length of the lease. Amount B is zero.

Where to report the inclusion amount. Report the inclusion amount figured (as described in the preceding discussions) as other income on the same form or schedule on which you took the deduction for your rental costs. For example, report the inclusion amount as other income on Schedule C (Form 1040) if you took the deduction on Schedule C. If you took the deduction for rental costs on Form 2106, report the inclusion amount as other income on Schedule 1 (Form 1040), line 8z.

Terms you may need to know (see Glossary):

Basis Convention Placed in service Recovery period

The depreciation deduction, including the section 179 deduction and special depreciation allowance, you can claim for a passenger automobile (defined earlier) each year is limited.

This section describes the maximum depreciation deduction amounts for 2025 and explains how to deduct, after the recovery period, the unrecovered basis of your property that results from applying the passenger automobile limits.

Exception for leased cars. The passenger automobile limits generally do not apply to passenger automobiles leased or held for leasing by anyone regularly engaged in the business of leasing passenger automobiles. For information on when you are considered regularly engaged in the business of leasing listed property, including passenger automobiles, see Exception for leased property, earlier, under What Is the Business-Use Requirement .

The passenger automobile limits are the maximum depreciation amounts you can deduct for a passenger automobile. They are based on the date you placed the automobile in service.

Passenger Automobiles

The maximum deduction amounts for most passenger automobiles are shown in the following table.

Maximum Depreciation Deduction for Passenger Au-

tomobiles (Including Trucks and Vans) Acquired Af- ter September 27, 2017, and Placed in Service Before

2026

Date 4th & Placed 1st 2nd 3rd Later in Service Year Year Year Year 2025 $20,200 ¹ $19,600 $11,800 $7,060 2024 $20,400 ² $19,800 $11,900 $7,160 2023 20,200 ³ 19,500 11,700 6,960 2022 19,200 ⁴ 18,000 10,800 6,460 2021 18,200 ⁵ 16,400 9,800 5,860 2020 18,100 ⁵ 16,100 9,700 5,760 2019 18,100 ⁶ 16,100 9,700 5,760 2018 18,000 ⁷ 16,000 9,600 5,760

1If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum depreciation deduction is $12,200.

2 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum depreciation deduction is $12,400.

3 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum depreciation deduction is $12,200.

4 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum depreciation deduction is $11,200.

5 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum depreciation deduction is $10,200.

6 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum depreciation deduction is $10,100.

7 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum depreciation deduction is $10,000.

Publication 946 (2025) Chapter 5 Additional Rules for Listed Property 59

Maximum Depreciation Deduction for Passenger Au-

tomobiles (Including Trucks and Vans) Acquired Be-

fore September 28, 2017, and Placed in Service Be-

Caution: If your business/investment use of the automobile is less than 100%, you must reduce the maximum deduction amount by multiplying the maximum amount by the percentage of business/investment use determined on an annual basis during the tax year.

Caution: If you have a short tax year, you must reduce the maximum deduction amount by multiplying the maximum amount by a fraction. The numerator of the fraction is the number of months and partial months in the short tax year, and the denominator is 12.

Example. On April 15, 2025, you bought and placed in service a new car for $14,500. You used the car only in your business. You file your tax return based on the calendar year. You do not elect a section 179 deduction and elected not to claim any special depreciation allowance for the 5-year property. Under MACRS, a car is 5-year property. Because you placed your car in service on April 15 and used it only for business, you use the percentages in Table A-1 to figure your MACRS depreciation on the car. You multiply the $14,500 unadjusted basis of your car by 0.20 to get your MACRS depreciation of $2,900 for 2025. This $2,900 is below the maximum depreciation deduction of $12,200 for passenger automobiles placed in service in 2025. You can deduct the full $2,900.

Electric Vehicles

The maximum depreciation deductions for passenger automobiles that are produced to run primarily on electricity are higher than those for other automobiles. The maximum deduction amounts for electric vehicles placed in service after August 5, 1997, and before January 1, 2007, are shown in the following table. Owners of electric vehicles placed in service after December 31, 2006, should use the table of maximum deduction amounts in the previous section titled Passenger Automobiles for electric vehicles classified as passenger automobiles or use the table of maximum deduction amounts for trucks and vans, later, for electric vehicles classified as trucks and vans.

Maximum Depreciation Deduction

for Electric Vehicles

Date 4th & Placed 1st 2nd 3rd Later in Service Year Year Year Years

2006 $8,980 $14,400 $8,650 $5,225

2005 8,880 14,200 8,450 5,125

2004 31,830 ¹ 14,300 8,550 5,125

5/06/2003– 32,030 ² 14,600 8,750 5,225 12/31/2003

1/01/2003– 22,880 ³ 14,600 8,750 5,225 5/05/2003

1 If you elected not to claim any special depreciation allowance for the vehicle, or the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $8,880.

fore 2020

Date 4th & Placed 1st 2nd 3rd Later in Service Year Year Year Year 2019 $14,900 ¹ $16,100 $9,700 $5,760 2018 16,400 ² 16,000 9,600 5,760

1 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum depreciation deduction is $10,100.

2 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum depreciation deduction is $10,000.

Maximum Depreciation Deduction for Passenger Au-

tomobiles Placed in Service Before 2018

Date 4th & Placed 1st 2nd 3rd Later in Service Year Year Year Years

2017 $11,160 ¹ $5,100 $3,050 $1,875

2016 11,160 ¹ 5,100 3,050 1,875

2015 11,160 ² 5,100 3,050 1,875

2014 11,160 ³ 5,100 3,050 1,875

2013 11,160 ³ 5,100 3,050 1,875

2012 11,160 ³ 5,100 3,050 1,875

2011 11,060 ⁴ 4,900 2,950 1,775

2010 11,060 ⁴ 4,900 2,950 1,775

2009 10,960 ⁵ 4,800 2,850 1,775

2008 10,960 ⁵ 4,800 2,850 1,775

2007 3,060 4,900 2,850 1,775

2006 2,960 4,800 2,850 1,775

1 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,160.

2 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,160. Also, if you placed the vehicle in service in a tax year beginning in 2015 and ending in 2016, and you elected to accelerate certain credits in lieu of the special depreciation for that tax year, the maximum deduction is $3,160.

3 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,160.

4 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,060.

5 If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $2,960.

60 Chapter 5 Additional Rules for Listed Property Publication 946 (2025)

2 If you acquired the vehicle before 5/06/03, the maximum deduction is $22,880. If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $9,080.

3 If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $9,080.

Trucks and Vans

The maximum depreciation deductions for trucks and vans placed in service after 2002 are higher than those for other passenger automobiles. The maximum deduction amounts for trucks and vans are shown in the following table.

Maximum Depreciation Deduction for Trucks and Vans Placed in Service Before 2018

Date 4th & Placed 1st 2nd 3rd Later in Service Year Year Year Years

2017 $11,560 ¹ $5,700 $3,450 $2,075

2016 11,560 ¹ 5,700 3,350 2,075

2015 11,460 ² 5,600 3,350 1,975

2014 11,460 ³ 5,500 3,350 1,975

2013 11,360 ⁴ 5,400 3,250 1,975

2012 11,360 ⁴ 5,300 3,150 1,875

2011 11,260 ⁵ 5,200 3,150 1,875

2010 11,160 ⁶ 5,100 3,050 1,875

2009 11,060 ⁷ 4,900 2,950 1,775

2008 11,160 ⁸ 5,100 3,050 1,875

2007 3,260 5,200 3,050 1,875

2006 3,260 5,200 3,150 1,875

1 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,560.

2 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,460. Also, if you placed the vehicle in service in a tax year beginning in 2015 and ending in 2016, and you elected to accelerate certain credits in lieu of the special depreciation for that tax year, the maximum deduction is $3,460.

3 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,460.

4 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,360.

5 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,260.

6 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,160.

7 If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $3,060.

8 If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $3,160.

Depreciation Worksheet for Passenger Automobiles

You can use the Depreciation Worksheet for Passenger Automobiles on the next page to figure your depreciation deduction using the percentage tables. Then, use the in- formation from this worksheet to prepare Form 4562.

If the depreciation deductions for your automobile are reduced under the passenger automobile limits, you will have unrecovered basis in your automobile at the end of the recovery period. If you continue to use the automobile for business, you can deduct that unrecovered basis after the recovery period ends. You can claim a depreciation deduction in each succeeding tax year until you recover your full basis in the car. The maximum amount you can deduct each year is determined by the date you placed the car in service and your business/investment-use percentage. See Maximum Depreciation Deduction, earlier.

Unrecovered basis is the cost or other basis of the passenger automobile reduced by any clean-fuel vehicle deduction, electric vehicle credit, depreciation, and section 179 deductions that would have been allowable if you had used the car 100% for business and investment use and the passenger automobile limits had not applied.

Caution: You cannot claim a depreciation deduction for listed property other than passenger automobiles after the recovery period ends. There is no unrecovered basis at the end of the recovery period because you are considered to have used this property 100% for business and investment purposes during all of the recovery period.

Example. In May 2019, you bought and placed in service a car costing $31,500. The car was 5-year property under GDS (MACRS). You did not elect a section 179 deduction and elected not to claim any special depreciation allowance for the 5-year property. You used the car exclusively for business during the recovery period (2019 through 2024). You figured your depreciation as shown below.

Publication 946 (2025) Chapter 5 Additional Rules for Listed Property 61

Depreciation Worksheet for Passenger Automobiles Keep for Your Records