4. Figuring Depreciation Under MACRS
Introduction
The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions.
To be sure you can use MACRS to figure depreciation for your property, see Which Method Can You Use To Depreciate Your Property inchapter 1.
This chapter explains how to determine which MACRS depreciation system applies to your property. It also discusses other information you need to know before you can figure depreciation under MACRS. This information includes the property's recovery class, placed-in-service date, and basis, as well as the applicable recovery period, convention, and depreciation method. It explains how to use this information to figure your depreciation deduction and how to use a general asset account to depreciate a group of properties. Finally, it explains when and how to recapture MACRS depreciation.
Useful Items - You may want to see:
Publication
- 225 Farmer's Tax Guide
463 Travel, Entertainment, Gift, and Car
Expenses- 544 Sales and Other Dispositions of Assets
- 551 Basis of Assets
- 587 Business Use of Your Home (Including Use by Daycare Providers)
Form (and Instructions)
2106
Employee Business Expenses2106-EZ
Unreimbursed Employee Business Expenses4562
Depreciation and Amortization
See chapter 6 for information about getting publications and forms.
Which Depreciation System (GDS or ADS) Applies?
Terms you may need to know (see Glossary):
| Listed property |
| Nonresidential real property |
| Placed in service |
| Property class |
| Recovery period |
| Residential rental property |
| Tangible property |
| Tax exempt |
Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines what depreciation method and recovery period you use. You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS.
If you placed your property in service in 2007, complete Part III of Form 4562 to report depreciation using MACRS. Complete section B of Part III to report depreciation using GDS, and complete section C of Part III to report depreciation using ADS. If you placed your property in service before 2007 and are required to file Form 4562, report depreciation using either GDS or ADS on line 17 in Part III.
Required use of ADS
You must use ADS for the following property.
Listed property used 50% or less in a qualified business use. See chapter 5 for information on listed property.
Any tangible property used predominantly outside the United States during the year.
Any tax-exempt use property.
Any tax-exempt bond-financed property.
All property used predominantly in a farming business and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect.
Any property imported from a foreign country for which an Executive Order is in effect because the country maintains trade restrictions or engages in other discriminatory acts.
Electing ADS
Although your property may qualify for GDS, you can elect to use ADS. The election generally must cover all property in the same property class that you placed in service during the year. However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Once you make this election, you can never revoke it. You make the election by completing line 20 in Part III of Form 4562.
Which Property Class Applies Under GDS?
Terms you may need to know (see Glossary):
| Class life |
| Nonresidential real property |
| Placed in service |
| Property class |
| Recovery period |
| Residential rental property |
| Section 1245 property |
| Section 1250 property |
The following is a list of the nine property classifications under GDS and examples of the types of property included in each class. These property classes are also listed under column (a) in section B, Part III, of Form 4562. For detailed information on property classes, see Appendix B, Table of Class Lives and Recovery Periods, in this publication.
3-year property.
Tractor units for over-the-road use.
Any race horse over 2 years old when placed in service.
Any other horse (other than a race horse) over 12 years old when placed in service.
Qualified rent-to-own property (defined later).
5-year property.
Automobiles, taxis, buses, and trucks.
Computers and peripheral equipment.
Office machinery (such as typewriters, calculators, and copiers).
Any property used in research and experimentation.
Breeding cattle and dairy cattle.
Appliances, carpets, furniture, etc., used in a residential rental real estate activity.
Certain geothermal, solar, and wind energy property.
7-year property.
Office furniture and fixtures (such as desks, files, and safes).
Agricultural machinery and equipment.
Any property that does not have a class life and has not been designated by law as being in any other class.
Certain motorsports entertainment complex property placed in service before January 1, 2008 (defined later).
Any natural gas gathering line placed in service after April 11, 2005. See Natural gas gathering line, natural gas distribution line, and electric transmission property, later.
10-year property.
Vessels, barges, tugs, and similar water transportation equipment.
Any single purpose agricultural or horticultural structure.
Any tree or vine bearing fruits or nuts.
15-year property.
Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges).
Any retail motor fuels outlet (defined later), such as a convenience store.
Any municipal wastewater treatment plant.
Any qualified leasehold improvement property (defined later) placed in service before January 1, 2008.
Any qualified restaurant property (defined later) placed in service before January 1, 2008.
Initial clearing and grading land improvements for gas utility property.
Electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity placed in service after April 11, 2005. See Natural gas gathering line, natural gas distribution line, and electric transmission property, later.
Any natural gas distribution line placed in service after April 11, 2005. See Natural gas gathering line, natural gas distribution line, and electric transmission property, later.
20-year property.
Farm buildings (other than single purpose agricultural or horticultural structures).
Municipal sewers not classified as 25-year property.
Initial clearing and grading land improvements for electric utility transmission and distribution plants.
25-year property. This class is water utility property, which is either of the following.
Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this provision, would be 20-year property.
Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996.
Residential rental property. This is any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental income for the tax year is from dwelling units. A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. It does not include a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis. If you occupy any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part you occupy.
Nonresidential real property. This is section 1250 property, such as an office building, store, or warehouse, that is neither residential rental property nor property with a class life of less than 27.5 years.
If your property is not listed above, you can determine its property class from the Table of Class Lives and Recovery Periods in Appendix B. The property class is generally the same as the GDS recovery period indicated in the table.
Qualified rent-to-own property. Qualified rent-to-own property is property held by a rent-to-own dealer for purposes of being subject to a rent-to-own contract. It is tangible personal property generally used in the home for personal use. It includes computers and peripheral equipment, televisions, videocassette recorders, stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators, and other similar consumer durable property. Consumer durable property does not include real property, aircraft, boats, motor vehicles, or trailers. If some of the property you rent to others under a rent-to-own agreement is of a type that may be used by the renters for either personal or business purposes, you still can treat this property as qualified property as long as it does not represent a significant portion of your leasing property. However, if this dual-use property does represent a significant portion of your leasing property, you must prove that this property is qualified rent-to-own property. Rent-to-own dealer. You are a rent-to-own dealer if you meet all the following requirements.You regularly enter into rent-to-own contracts in the ordinary course of your business for the use of consumer property.
A substantial portion of these contracts end with the customer returning the property before making all the payments required to transfer ownership.
The property is tangible personal property of a type generally used within the home for personal use.
Is titled “Rent-to-Own Agreement,” “Lease Agreement with Ownership Option,” or other similar language.
Provides a beginning date and a maximum period of time, not to exceed 156 weeks or 36 months from the beginning date, for which the contract can be in effect (including renewals or options to extend).
Provides for regular periodic (weekly or monthly) payments that can be either level or decreasing. If the payments are decreasing, no payment can be less than 40 percent of the largest payment.
Provides for total payments that generally exceed the normal retail price of the property plus interest.
Provides for total payments that do not exceed $10,000 for each item of property.
Provides that the customer has no legal obligation to make all payments outlined in the contract and that, at the end of each weekly or monthly payment period, the customer can either continue to use the property by making the next payment or return the property in good working order with no further obligations and no entitlement to a return of any prior payments.
Provides that legal title to the property remains with the rent-to-own dealer until the customer makes either all the required payments or the early purchase payments required under the contract to acquire legal title.
Provides that the customer has no right to sell, sublease, mortgage, pawn, pledge, or otherwise dispose of the property until all contract payments have been made.
Motorsports entertainment complex
This is a racing track facility permanently situated on land that hosts one or more racing events for automobiles, trucks, or motorcycles during the 36-month period after the first day of the month in which the facility is placed in service. The events must be open to the public for the price of admission.
Retail motor fuels outlet
Real property is a retail motor fuels outlet if it is used to a substantial extent in the retail marketing of petroleum or petroleum products (whether or not it is also used to sell food or other convenience items) and meets any one of the following three tests.
It is not larger than 1,400 square feet.
50% or more of the gross revenues generated from the property are derived from petroleum sales.
50% or more of the floor space in the property is devoted to petroleum marketing sales.
Qualified leasehold improvement property
Generally, this is any improvement to an interior part of a building that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor's death or in any of the following types of transactions.
A transaction to which section 381(a) applies,
A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business,
A like-kind exchange, involuntary conversion, or reacquisition of real property to the extent that the basis in the property represents the carryover basis, or
Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor's or distributor's basis in the property. Examples include the following.
A complete liquidation of a subsidiary.
A transfer to a corporation controlled by the transferor.
An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization.
Qualified restaurant property
Qualified restaurant property is any section 1250 property that is an improvement to a building and meets the following requirements.
The improvement is placed in service more than 3 years after the date the building was first placed in service, and
More than 50% of the building's square footage is devoted to preparation of meals and seating for on-premise consumption of prepared meals.
Natural gas gathering line, natural gas distribution line, and electric transmission property
Any natural gas gathering line placed in service after April 11, 2005, is treated as 7-year property, and electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity and any natural gas distribution line placed in service after April 11, 2005, are treated as 15-year property, if the following requirements are met.
The original use of the property must have begun with you after April 11, 2005. Original use means the first use to which the property is put, whether or not by you. Therefore, property used by any person before April 12, 2005, is not original use. Original use includes additional capital expenditures you incurred to recondition or rebuild your property. However, original use does not include the cost of reconditioned or rebuilt property you acquired. Property containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20 percent of the total cost of the property.
The property must not be placed in service under a binding contract in effect before April 12, 2005.
The property must not be self-constructed property (property you manufacture, construct, or produce for your own use), if you began the manufacture, construction, or production of the property before April 12, 2005. Property that is manufactured, constructed, or produced for your use by another person under a written binding contract entered into by you or a related party before the manufacture, construction, or production of the property, is considered to be manufactured, constructed, or produced by you.
What Is the Placed-in-Service Date?
Terms you may need to know (see Glossary):
| Placed in service |
You begin to claim depreciation when your property is placed in service for either use in a trade or business or the production of income. The placed-in-service date for your property is the date the property is ready and available for a specific use. It is therefore not necessarily the date it is first used. If you converted property held for personal use to use in a trade or business or for the production of income, treat the property as being placed in service on the conversion date. See Placed in Service under When Does Depreciation Begin and End in chapter 1 for examples illustrating when property is placed in service.
What Is the Basis for Depreciation?
Terms you may need to know (see Glossary):
| Basis |
The basis for depreciation of MACRS property is the property's cost or other basis multiplied by the percentage of business/investment use. For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing Activity in chapter 1. Reduce that amount by any credits and deductions allocable to the property. The following are examples of some credits and deductions that reduce basis.
Any deduction for section 179 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.
Any deduction under section 179D of the Internal Revenue Code for certain energy efficient commercial building property placed in service after December 31, 2005.
Any deduction under section 179E of the Internal Revenue Code for qualified advanced mine safety equipment property placed in service after December 20, 2006.
Any deduction for removal of barriers to the disabled and the elderly.
Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services.
Any special depreciation allowance.
Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code.
For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code.
Enter the basis for depreciation under column (c) in Part III of Form 4562. For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property in chapter 1.
Which Recovery Period Applies?
Terms you may need to know (see Glossary):
| Active conduct of a trade or business |
| Basis |
| Improvement |
| Listed property |
| Nonresidential real property |
| Placed in service |
| Property class |
| Recovery period |
| Residential rental property |
| Section 1245 property |
The recovery period of property is the number of years over which you recover its cost or other basis. It is determined based on the depreciation system (GDS or ADS) used.
Recovery Periods Under GDS
Under GDS, property that is not qualified Indian reservation property is depreciated over one of the following recovery periods.
| Property Class | Recovery Period | |||
| 3-year property | 3 years | 1 | ||
| 5-year property | 5 years | |||
| 7-year property | 7 years | |||
| 10-year property | 10 years | |||
| 15-year property | 15 years | 2 | ||
| 20-year property | 20 years | |||
| 25-year property | 25 years | 3 | ||
| Residential rental property | 27.5 years | |||
| Nonresidential real property | 39 years | 4 | ||
| 15 years for qualified rent-to-own property placed in service before August 6, 1997. | ||||
| 239 years for property that is a retail motor fuels outlet placed in service before August 20, 1996 (31.5 years if placed in service before May 13, 1993), unless you elected to depreciate it over 15 years. | ||||
| 320 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996. | ||||
| 431.5 years for property placed in service before May 13, 1993 (or before January 1, 1994, if the purchase or construction of the property is under a binding contract in effect before May 13, 1993, or if construction began before May 13, 1993). | ||||
The GDS recovery periods for property not listed above can be found in Appendix B, Table of Class Lives and Recovery Periods. Residential rental property and nonresidential real property are defined earlier under Which Property Class Applies Under GDS.
Enter the appropriate recovery period on Form 4562 under column (d) in section B of Part III, unless already shown (for 25-year property, residential rental property, and nonresidential real property).
Office in the home
If your home is a personal-use single family residence and you begin to use part of your home as an office, depreciate that part of your home as nonresidential real property over 39 years (31.5 years if you began using it for business before May 13, 1993). However, if your home is an apartment in an apartment building that you own and the building is residential rental property as defined earlier under Which Property Class Applies Under GDS, depreciate the part used as an office as residential rental property over 27.5 years. See Publication 587 for a discussion of the tests you must meet to claim expenses, including depreciation, for the business use of your home.
Home changed to rental use
If you begin to rent a home that was your personal home before 1987, you depreciate it as residential rental property over 27.5 years.
Indian Reservation Property
The recovery periods for qualified property you placed in service on an Indian reservation after 1993 and before 2008 are shorter than those listed earlier. The following table shows these shorter recovery periods.
| Property Class | Recovery Period |
| 3-year property | 2 years |
| 5-year property | 3 years |
| 7-year property | 4 years |
| 10-year property | 6 years |
| 15-year property | 9 years |
| 20-year property | 12 years |
| Nonresidential real property | 22 years |
Nonresidential real property is defined earlier under Which Property Class Applies Under GDS.
Qualified property
Property eligible for the shorter recovery periods are 3-, 5-, 7-, 10-, 15-, and 20-year property and nonresidential real property. You must use this property predominantly in the active conduct of a trade or business within an Indian reservation. The rental of real property that is located on an Indian reservation is treated as the active conduct of a trade or business within an Indian reservation. The following property is not qualified property.
Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property.
Property acquired directly or indirectly from a related person.
Property placed in service for purposes of conducting or housing class I, II, or III gaming activities. These activities are defined in section 4 of the Indian Regulatory Act (25 U.S.C. 2703).
Any property you must depreciate under ADS. Determine whether property is qualified without regard to the election to use ADS and after applying the special rules for listed property not used predominantly for qualified business use (discussed in chapter 5).
Qualified infrastructure property
Item (1) above does not apply to qualified infrastructure property located outside the reservation that is used to connect with qualified infrastructure property within the reservation. Qualified infrastructure property is property that meets all the following rules.
It is qualified property, as defined earlier, except that it is outside the reservation.
It benefits the tribal infrastructure.
It is available to the general public.
It is placed in service in connection with the active conduct of a trade or business within a reservation.
Related person
For purposes of item (2) above, see Related persons in the discussion on property owned or used in 1986 under Which Method Can You Use To Depreciate Your Property in chapter 1 for a description of related persons.
Indian reservation
The term Indian reservation means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 (25 U.S.C. 1452(d)) or section 4(10) of the Indian Child Welfare Act of 1978 (25 U.S.C. 1903(10)). Section 3(d) of the Indian Financing Act of 1974 defines reservation to include former Indian reservations in Oklahoma. For a definition of the term “former Indian reservations in Oklahoma”, see Notice 98-45 in Internal Revenue Bulletin 1998-35.
Recovery Periods Under ADS
The recovery periods for most property generally are longer under ADS than they are under GDS. The following table shows some of the ADS recovery periods.
| Property | Recovery Period |
| Rent-to-own property | 4 years |
| Automobiles and light duty trucks | 5 years |
| Computers and peripheral equipment | 5 years |
| High technology telephone station equipment installed on customer premises | 5 years |
| High technology medical equipment | 5 years |
| Personal property with no class life | 12 years |
| Natural gas gathering lines | 14 years |
| Single purpose agricultural and horticultural structures | 15 years |
| Any tree or vine bearing fruit or nuts | 20 years |
| Initial clearing and grading land improvements for gas utility property | 20 years |
| Initial clearing and grading land improvements for electric utility transmission and distribution plants | 25 years |
| Electric transmission property used in the transmission at 69 or more kilovolts of electricity | 30 years |
| Natural gas distribution lines | 35 years |
| Any qualified leasehold improvement property | 39 years |
| Any qualified restaurant property | 39 years |
| Nonresidential real property | 40 years |
| Residential rental property | 40 years |
| Section 1245 real property not listed in Appendix B | 40 years |
| Railroad grading and tunnel bore | 50 years |
The ADS recovery periods for property not listed above can be found in the tables in Appendix B. Rent-to-own property, qualified leasehold improvement property, qualified restaurant property, residential rental property, and nonresidential real property are defined earlier under Which Property Class Applies Under GDS.
Tax-exempt use property subject to a lease. The ADS recovery period for any property leased under a lease agreement to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership) cannot be less than 125 percent of the lease term.Additions and Improvements
An addition or improvement you make to depreciable property is treated as separate depreciable property. See How Do You Treat Repairs and Improvements in chapter 1 for a definition of improvements. Its property class and recovery period are the same as those that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. The recovery period begins on the later of the following dates.
The date you place the addition or improvement in service.
The date you place in service the property to which you made the addition or improvement.
Example —
You own a rental home that you have been renting out since 1981. If you put an addition on the home and place the addition in service this year, you would use MACRS to figure your depreciation deduction for the addition. Under GDS, the property class for the addition is residential rental property and its recovery period is 27.5 years because the home to which the addition is made would be residential rental property if you had placed it in service this year.
Which Convention Applies?
Terms you may need to know (see Glossary):
| Basis |
| Convention |
| Disposition |
| Nonresidential real property |
| Placed in service |
| Recovery period |
| Residential rental property |
Under MACRS, averaging conventions establish when the recovery period begins and ends. The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property.
The mid-month convention. Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel bore. Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of. Your use of the mid-month convention is indicated by the “MM” already shown under column (e) in Part III of Form 4562. The mid-quarter convention. Use this convention if the mid-month convention does not apply and the total depreciable bases of MACRS property you placed in service during the last 3 months of the tax year (excluding nonresidential real property, residential rental property, any railroad grading or tunnel bore, property placed in service and disposed of in the same year, and property that is being depreciated under a method other than MACRS) are more than 40% of the total depreciable bases of all MACRS property you placed in service during the entire year. Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter. This means that 1½ months of depreciation is allowed for the quarter the property is placed in service or disposed of. If you use this convention, enter “MQ” under column (e) in Part III of Form 4562. For purposes of determining whether the mid-quarter convention applies, the depreciable basis of property you placed in service during the tax year reflects the reduction in basis for amounts expensed under section 179 and the part of the basis of property attributable to personal use. However, it does not reflect any reduction in basis for any special depreciation allowance. The half-year convention. Use this convention if neither the mid-quarter convention nor the mid-month convention applies. Under this convention, you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of the year. This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of. If you use this convention, enter “HY” under column (e) in Part III of Form 4562.Which Depreciation Method Applies?
Terms you may need to know (see Glossary):
| Declining balance method |
| Listed property |
| Nonresidential real property |
| Placed in service |
| Property class |
| Recovery period |
| Residential rental property |
| Straight line method |
| Tax exempt |
MACRS provides three depreciation methods under GDS and one depreciation method under ADS.
The 200% declining balance method over a GDS recovery period.
The 150% declining balance method over a GDS recovery period.
The straight line method over a GDS recovery period.
The straight line method over an ADS recovery period.
Table 4-1 lists the types of property you can depreciate under each method. It also gives a brief explanation of the method, including any benefits that may apply.
Depreciation Methods for Farm Property
If you place personal property in service in a farming business after 1988, you generally must depreciate it under GDS using the 150% declining balance method unless you are a farmer who must depreciate the property under ADS using the straight line method or you elect to depreciate the property under GDS or ADS using the straight line method. You can depreciate real property using the straight line method under either GDS or ADS.
Fruit or nut trees and vines
Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a recovery period of 10 years.
ADS required for some farmers
If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must use ADS. You must use ADS for all property you place in service in any year the election is in effect. See the regulations under section 263A of the Internal Revenue Code for information on the uniform capitalization rules that apply to farm property.
Electing a Different Method
As shown in Table 4-1, you can elect a different method for depreciation for certain types of property. You must make the election by the due date of the return (including extensions) for the year you placed the property in service. However, if you timely filed your return for the year without making the election, you still can 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. File the amended return at the same address you filed the original return. Once you make the election, you cannot change it.
If you elect to use a different method for one item in a property class, you must apply the same method to all property in that class placed in service during the year of the election. However, you can make the election on a property-by-property basis for nonresidential real and residential rental property. 150% election. Instead of using the 200% declining balance method over the GDS recovery period for nonfarm property in the 3-, 5-, 7-, and 10-year property classes, you can elect to use the 150% declining balance method. Make the election by entering “150 DB” under column (f) in Part III of Form 4562.Straight line election
Instead of using either the 200% or 150% declining balance methods over the GDS recovery period, you can elect to use the straight line method over the GDS recovery period. Make the election by entering
“S/L” under column (f) in Part III of Form 4562.
Election of ADS
As explained earlier under Which Depreciation System (GDS or ADS) Applies, you can elect to use ADS even though your property may come under GDS. ADS uses the straight line method of depreciation over fixed ADS recovery periods. Most ADS recovery periods are listed in Appendix B, or see the table under Recovery Periods Under ADS, earlier. Make the election by completing line 20 in Part III of Form 4562.
Farm property
Instead of using the 150% declining balance method over a GDS recovery period for property you use in a farming business (other than real property), you can elect to depreciate it using either of the following methods.
The straight line method over a GDS recovery period.
The straight line method over an ADS recovery period.
Table 4-1. Depreciation Methods
| Note. The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. | ||
|---|---|---|
| Method | Type of Property | Benefit |
| GDS using 200% DB | • Nonfarm 3-, 5-, 7-, and 10-year property | • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction |
| GDS using 150% DB | • All farm property (except real property) • All 15- and 20-year property (except qualified leasehold improvement property and qualified restaurant property placed in service before January 1, 2008) • Nonfarm 3-, 5-, 7-, and 10-year property | • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction 1 |
| GDS using SL | • Nonresidential real property • Qualified leasehold improvement property placed in service before January 1, 2008 • Qualified restaurant property placed in service before January 1, 2008 • Residential rental property • Trees or vines bearing fruit or nuts • Water utility property • All 3-, 5-, 7-, 10-, 15-, and 20-year property 2 | • Provides for equal yearly deductions (except for the first and last years) |
| ADS using SL | • Listed property used 50% or less for business • Property used predominantly outside the U.S. • Qualified leasehold improvement property placed in service before January 1, 2008 • Qualified restaurant property placed in service before January 1, 2008 • Tax-exempt property • Tax-exempt bond-financed property • Farm property used when an election not to apply the uniform capitalization rules is in effect • Imported property 3 • Any property for which you elect to use this method 2 | • Provides for equal yearly deductions |
| 1The MACRS percentage tables in Appendix A have the switch to the straight line method built into their rates | ||
| 2Elective method | ||
| 3See section 168(g)(6) of the Internal Revenue Code | ||
How Is the Depreciation Deduction Figured?
Terms you may need to know (see Glossary):
| Adjusted basis |
| Amortization |
| Basis |
| Business/investment use |
| Convention |
| Declining balance method |
| Disposition |
| Exchange |
| Nonresidential real property |
| Placed in service |
| Property class |
| Recovery period |
| Straight line method |
To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed-in-service date, basis amount, recovery period, convention, and depreciation method that applies to your property. Then, you are ready to figure your depreciation deduction. You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table.
Using the MACRS Percentage Tables
To help you figure your deduction under MACRS, the IRS has established percentage tables that incorporate the applicable convention and depreciation method. These percentage tables are in Appendix A near the end of this publication.
Which table to use
Appendix A contains the MACRS Percentage Table Guide, which is designed to help you locate the correct percentage table to use for depreciating your property. The percentage tables immediately follow the guide.
Rules Covering the Use of the Tables
The following rules cover the use of the percentage tables.
You must apply the rates in the percentage tables to your property's unadjusted basis.
You cannot use the percentage tables for a short tax year. See Figuring the Deduction for a Short Tax Year, later, for information on the short tax year rules.
Once you start using the percentage tables for any item of property, you generally must continue to use them for the entire recovery period of the property.
You must stop using the tables if you adjust the basis of the property for any reason other than—
Depreciation allowed or allowable, or
An addition or improvement to that property that is depreciated as a separate item of property.
Basis adjustments other than those made due to the items listed in (4) include an increase in basis for the recapture of a clean-fuel deduction or credit and a reduction in basis for a casualty loss.
Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. If you increase the basis of your property because of the recapture of part or all of a deduction for clean-fuel vehicles or the credit for clean-fuel vehicle refueling property placed in service before January 1, 2006, you cannot continue to use the percentage tables. For the year of the adjustment and the remaining recovery period, you must figure the depreciation deduction yourself using the property's adjusted basis at the end of the year. See Figuring the Deduction Without Using the Tables, later.Basis adjustment due to casualty loss
If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. For the year of the adjustment and the remaining recovery period, you must figure the depreciation yourself using the property's adjusted basis at the end of the year. See Figuring the Deduction Without Using the Tables, later.
Example —
On October 26, 2006, Sandra Elm, a calendar year taxpayer, bought and placed in service in her business a new item of 7-year property. It cost $39,000 and she elected a section 179 deduction of $24,000. She also took a special depreciation allowance of $7,500 [50% of $15,000 ($39,000 - $24,000)]. Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 - $7,500). She figured her MACRS depreciation deduction using the percentage tables. For 2006, her MACRS depreciation deduction was $268.
In July 2007, the property was vandalized and Sandra had a deductible casualty loss of $3,000. She must adjust the property's basis for the casualty loss, so she can no longer use the percentage tables. Her adjusted basis at the end of 2007, before figuring her 2007 depreciation, is $4,232. She figures that amount by subtracting the 2006 MACRS depreciation of $268 and the casualty loss of $3,000 from the unadjusted basis of $7,500. She must now figure her depreciation for 2007 without using the percentage tables.
Figuring the Unadjusted Basis of Your Property
You must apply the table rates to your property's unadjusted basis each year of the recovery period. Unadjusted basis is the same basis amount you would use to figure gain on a sale, but you figure it without reducing your original basis by any MACRS depreciation taken in earlier years. However, you do reduce your original basis by other amounts, including the following.
Any amortization taken on the property.
Any section 179 deduction claimed.
Any special depreciation allowance taken on the property.
For business property you purchase during the year, the unadjusted basis is its cost minus these and other applicable adjustments. If you trade property, your unadjusted basis in the property received is the cash paid plus the adjusted basis of the property traded minus these adjustments.
MACRS Worksheet
You can use this worksheet to help you figure your depreciation deduction using the percentage tables. Use a separate worksheet for each item of property. Then, use the information from this worksheet to prepare Form 4562.
Do not use this worksheet for automobiles. Use the Depreciation Worksheet for Passenger Automobiles in chapter 5.MACRS Worksheet
| Part I | ||||
| 1. | MACRS system (GDS or ADS) | |||
| 2. | Property class | |||
| 3. | Date placed in service | |||
| 4. | Recovery period | |||
| 5. | Method and convention | |||
| 6. | Depreciation rate (from tables) | |||
| Part II | ||||
| 7. | Cost or other basis* | $ | ||
| 8. | Business/investment use | % | ||
| 9. | Multiply line 7 by line 8 | $ | ||
| 10. | Total claimed for section 179 deduction and other items | $ | ||
| 11. | Subtract line 10 from line 9. This is your tentative basis for depreciation | $ | ||
| 12. | Multiply line 11 by .30 if the 30% special depreciation allowance applies. Multiply line 11 by .50 if the 50% 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 | $ | ||
| 13. | Subtract line 12 from line 11. This is your basis for depreciation | |||
| 14. | Depreciation rate (from line 6) | |||
| 15. | Multiply line 13 by line 14. This is your MACRS depreciation deduction | $ | ||
| *If real estate, do not include cost (basis) of land. | ||||
The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet.
Example —
You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2007. You use the furniture only for business. This is the only property you placed in service this year. You did not elect a section 179 deduction and the property is not qualified property for purposes of claiming a special depreciation allowance so your property's unadjusted basis is its cost, $10,000. You use GDS and the half-year convention to figure your depreciation. You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. You figure your depreciation deduction using the MACRS worksheet as follows.
MACRS Worksheet
| Part I | ||||
| 1. | MACRS system (GDS or ADS) | GDS | ||
| 2. | Property class | 7-year | ||
| 3. | Date placed in service | 8/11/07 | ||
| 4. | Recovery period | 7-Year | ||
| 5. | Method and convention | 200%DB/Half-Year | ||
| 6. | Depreciation rate (from tables) | .1429 | ||
| 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 .30 if the 30% special depreciation allowance applies. Multiply line 11 by .50 if the 50% 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) | .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 | |||
| 2008 | $ | 10,000 | 24.49% | $2,449 | ||
| 2009 | 10,000 | 17.49 | 1,749 | |||
| 2010 | 10,000 | 12.49 | 1,249 | |||
| 2011 | 10,000 | 8.93 | 893 | |||
| 2012 | 10,000 | 8.92 | 892 | |||
| 2013 | 10,000 | 8.93 | 893 | |||
| 2014 | 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 —
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 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 —
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 is qualified property for purposes of claiming a special depreciation allowance.
You placed property in service during the last three 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 is $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, 2004, 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 2004 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 2004, 2005, and 2006 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22.80% of $10,000). You disposed of the property on April 6, 2007. To determine your depreciation deduction for 2007, 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% to get your depreciation deduction of $513 for 2007.
Example —
On July 2, 2005, 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, 2007. You file your tax return based on the calendar year.
A full year of depreciation for 2007 is $3,636. This is $100,000 multiplied by .03636 (the percentage for the seventh month of the third recovery year) from Table A-6. You then apply the mid-month convention for the 2½ months of use in 2007. Treat the month of disposition as one-half month of use. Multiply $3,636 by the fraction, 2.5 over 12, to get your 2007 depreciation deduction of $757.50.
Figuring the Deduction Without Using the Tables
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.
Figuring MACRS deductions without using the tables generally will 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.
Multiply your adjusted basis in the property by the declining balance rate.
Apply the applicable convention.
You figure depreciation for all other years (before the year you switch to the straight line method) as follows.
Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years.
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 information 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.
| Property Class | Method | Declining Balance Rate | Year |
|---|---|---|---|
| 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.
Multiply your adjusted basis in the property by the straight line rate.
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.
Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method).
Determine the depreciation rate for the year.
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 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, March |
| Second | April, May, June |
| Third | July, August, September |
| Fourth | October, November, December |
| Quarter | Percentage |
|---|---|
| First | 87.5% |
| Second | 62.5 |
| Third | 37.5 |
| Fourth | 12.5 |
| Quarter | Percentage |
|---|---|
| First | 12.5% |
| Second | 37.5 |
| Third | 62.5 |
| Fourth | 87.5 |
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 —
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% declining balance (DB) method to figure your depreciation. When the straight line (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.
You figure the depreciation rate under the straight line (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 one 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 —
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 straight line (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 .02564. The depreciation for a full year is $2,564 ($100,000 × .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 .958. Your first-year depreciation for the building is $2,456 ($2,564 × .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 .02629. This is 1 divided by the remaining recovery period of 38.042 years (39 years reduced by 11.5 months or .958 year). Your depreciation for the building for the second year is $2,564 ($97,544 × .02629).
Third year. The adjusted basis is $94,980 ($97,544 - $2,564). The SL rate is .027 (1 divided by 37.042 remaining years). Your depreciation for the third year is $2,564 ($94,980 × .027).
Example —
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 (not listed property) | 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% declining balance (DB) method to figure the depreciation. The total bases of all property you placed in service this year is $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 .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 × .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 × .28571).
First and second year depreciation for furniture. The furniture is also 7-year property, so you use the same 200% DB rate of .28571. You multiply the basis of the furniture ($1,000) by .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 × .28571).
First