How To Figure the Deduction Using Percentage Tables

Once you determine that your property can be depreciated under MACRS and whether it falls under GDS or ADS, you are ready to figure your deduction. To help you figure your deduction, the IRS has established percentage tables. To use these percentage tables to figure your MACRS deduction each year, you need to know the following information about your property.

• Its basis.
• Its property class and recovery period.
• The date it was placed in service.
• Which convention to use.
• Which depreciation method to use.

Basis

Words you may need to know (see Glossary):

• Abstract fees
• Adjusted basis
• Basis
• Business/investment use
• Fair market value (FMV)
• Nontaxable exchange
• Taxable exchange

To figure your depreciation deduction, you must determine the basis of your property. To determine basis, you need to know the cost or other basis of your property. If you bought the property, your basis is the amount you paid for the property plus amounts you paid for items such as sales tax, freight charges, and installation and testing fees. "Other basis" refers to basis that is determined by the way you received the property. For example, you may have received the property through an exchange, for services you performed, as a gift, or as an inheritance. If you received property in this or some other way, see Publication 551 to determine your basis.

Cost as Basis

The basis for property is generally its cost. The cost includes the amount you pay in cash, in debt obligation, in other property, or in services.

Assumed debt. If you buy property and assume (or buy subject to) an existing mortgage or other debt on the property, your basis includes the amount you assume.

Example. You pay a $20,000 down payment for property and assume the seller's mortgage of $120,000. Your total cost is $140,000, the cash you paid plus the mortgage you assumed.

Settlement fees and other costs. The basis of real property also includes certain fees and charges you pay with the purchase. These fees are generally shown on your settlement statement.

If you buy real property and agree to pay the real estate taxes the seller owed and the seller did not reimburse you, add the taxes you pay to the basis of your property. Other fees or charges you pay that you should add to the basis of your property include the following.

• Legal and recording fees.
• Abstract fees.
• Survey charges.
• Title insurance.
• Amounts the seller owed, such as interest, recording or mortgage fees, and sales commissions.

Property you construct or build. If you construct, build, or otherwise produce property for use in your business, you may have to use the uniform capitalization rules to determine the basis of your property. For information about the uniform capitalization rules, see Publication 551.

Adjusted Basis

You may have to make certain adjustments (increases and decreases) to the basis of property for events occurring between the time you acquired the property and the time you placed it in service. These events could include the following.

• Installing utility lines.
• Legal fees for perfecting the title.
• Settling zoning issues.
• Removing barriers.
• Receiving rebates.

For a discussion of adjustments to the basis of your property, see Adjusted Basis in Publication 551.

Property Changed From Personal Use

If you held property for personal use and later change it to business use or use in the production of income, your basis is the lesser of the following.

1. The fair market value (FMV) of the property on the date you change it from personal use.
2. Your original cost or other basis adjusted as follows.
   1. Increased by the cost of any permanent improvements or additions and other costs that must be added to basis.
   2. Decreased by any tax deductions you claimed for casualty and theft losses and other items that reduced your basis.

Example. Several years ago Nia paid $160,000 to have her home built on a lot that cost her $10,000. Before changing the property to rental use last year, she paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house. Because land is not depreciable, she can only include the cost of the house when figuring the basis for depreciation.

Nia's adjusted basis in the house when she changed it to business use was $178,000 ($160,000 + $20,000 - $2,000). On the same date her property had an FMV of $180,000, of which $30,000 was for the land and $150,000 was for the house. The basis for depreciation on the house is the FMV ($150,000), because it is less than her adjusted basis ($178,000).

Use of Property

If you use an item of property for more than one purpose, you must determine how much of your use of the property is for each of the following.

• Business use
• Investment use
• Personal use

Combine investment use with business use to figure your depreciation deductions. Do not consider investment use, however, when determining whether listed property is used predominantly in a qualified business use. Listed property and the predominant use test are discussed in chapter 4.

Property Classes and Recovery Periods

Words you may need to know (see Glossary):

• Basis
• Class life
• Placed in service
• Property class
• Recovery period
• Section 1250 property
• Straight line method

Under MACRS, property is assigned to one of several property classes. These property classes are based on pre-established class lives and establish the recovery periods (number of years) over which you recover the basis of your property. For example, property with a class life of 4 years or less is in the 3-year property class and has a 3-year recovery period. Class lives and recovery periods for most property can be found in the Appendix B, Table of Class Lives and Recovery Periods.

GDS

Under GDS, most tangible property is assigned to one of eight main property classes. The following is a list of the property classes and examples of the types of property included in each class.

1. 3-year property.
   1. Tractor units for over-the-road use.
   2. Any race horse over 2 years old when placed in service.
   3. Any other horse over 12 years old when placed in service.
   4. Qualified rent-to-own property.

2. 5-year property.
   1. Automobiles, taxis, buses, and trucks.
   2. Computers and peripheral equipment.
   3. Office machinery (such as typewriters, calculators, and copiers).
   4. Any property used in research and experimentation.
   5. Breeding cattle and dairy cattle.

3. 7-year property.
   1. Office furniture and fixtures (such as desks, files, and safes).
   2. Any property that does not have a class life and has not been designated by law as being in any other class.

4. 10-year property.
   1. Vessels, barges, tugs, and similar water transportation equipment.
   2. Any single purpose agricultural or horticultural structure.
   3. Any tree or vine bearing fruits or nuts.

5. 15-year property.
   1. Certain depreciable improvements made directly to land or added to it (such as shrubbery, fences, roads, and bridges).
   2. Service station buildings and other land improvements used in the marketing of petroleum and petroleum products (but not facilities related to petroleum and natural gas trunk pipelines).

6. 20-year property. This class includes farm buildings (other than single purpose agricultural or horticultural structures).
7. Residential rental property. This class includes real property such as a rental home or structure (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, inn, 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. The recovery period for this property is 27.5 years.
8. Nonresidential real property. This class includes section 1250 property that is neither of the following.
   1. Residential rental property (defined in (7)).
   2. Property with a class life of less than 27.5 years.

The recovery period for nonresidential real property is:

• 39 years for property you placed in service after May 12, 1993, or
• 31.5 years for property you placed in service before May 13, 1993.

However, property you placed in service before January 1, 1994, will not be subject to the longer recovery period if you or a "qualified person" entered into a binding written contract to purchase or construct the property before May 13, 1993, or you (or a qualified person) began construction of the property before May 13, 1993. A qualified person is anyone who transfers a contract or property to you so long as the property was not placed in service by the transferor.

Office in the home. If 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) under GDS. See Publication 587 for a discussion of the tests you must meet to claim expenses, including depreciation, for the business use of your home.

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. You can depreciate qualified rent-to-own property under GDS over 3 years (5 years if you placed it in service before August 6, 1997).

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.
• 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.

Rent-to-own contract. This is any lease for the use of consumer property between a rent-to-own dealer and a customer who is an individual. The lease contract must meet all the following rules.

• Must be titled "Rent-to-Own Agreement," "Lease Agreement with Ownership Option," or other similar language.
• Provide 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).
• Provide 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.
• Provide for total payments to generally exceed the normal retail price of the property plus interest.
• Provide for total payments that do not exceed $10,000 for each item of property.
• Provide 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 and be free of any further obligations and not entitled to a return of any prior payments.
• Provide 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.
• Provide 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.

Qualified rent-to-own property. This 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 can still treat this property as qualified property as long as it does not represent a significant portion of your leasing property. But, 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.

Water utility property. Depreciate water utility property you place in service after June 12, 1996 (unless you placed it in service under a binding contract in effect before June 10, 1996, and at all times until you place the property in service), using the straight line method over a 25-year recovery period.

Water utility property 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 have a 20-year recovery period.
• Any municipal sewer.

Gas station convenience stores (retail motor fuels outlet). Depreciable real property that is a retail motor fuels outlet (whether or not it sells food or other convenience items) placed in service after August 19, 1996, is 15-year property. If you placed the property in service before August 20, 1996, you could have chosen to treat it as 15-year property.

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 and it 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.

A retail motor fuels outlet does not include any facility related to petroleum and natural gas trunk pipelines.

Personal home changed to rental use. If you begin to rent a home after 1986 that was your personal home before 1987, you depreciate it as residential rental property over 27.5 years under GDS.

Additions or improvements to property. The recovery period for an addition or improvement you make to any property, including leased property, is the one that would apply to the underlying 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 the property to which you made the addition or improvement in service.

Example. You own a rental home which 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.

Property Used on Indian Reservations

You can use shorter recovery periods for qualified property you placed in service on an Indian reservation after 1993 and before 2004. These recovery periods are discussed later under Recovery periods.

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. Real property you rent to others that is located on an Indian reservation is also eligible for the shorter recovery periods.

The following property is not qualified property.

1. Property used or located outside an Indian reservation on a regular basis.
2. Property acquired directly or indirectly from a related person (discussed later).
3. 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)).
4. Any property you must depreciate under the Alternative Depreciation System (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 in a qualified business (discussed in chapter 4).

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.

Infrastructure property includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities.

Related person. A related person is either of the following.

• A person who bears a relationship to you as described in the list of related persons in chapter 2, except that 10% is substituted for 50% each place it appears and related persons also include brothers and sisters.
• A person with whom you are engaged in trades or businesses that are under common control as described in section 52(a) and 52(b) of the Internal Revenue Code.

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)). For a definition of the term "former Indian reservations in Oklahoma" as used in section 3(d) of the Indian Financing Act of 1974, see Notice 98-45 in Cumulative Bulletin 1998-2. Cumulative Bulletins are available at many libraries and Internal Revenue Service offices.

Recovery periods. The following table shows the shorter recovery periods you can use for qualified property.

ADS

As discussed earlier under When To Use ADS, you must use ADS for certain property or you can elect to use ADS for property that qualifies for GDS. This election is discussed later under Election of ADS. If you use ADS, you will recover the cost of your property using the straight line method of depreciation. The recovery periods for most property are generally longer under ADS than they are under GDS. The following table shows some of the ADS recovery periods.

The ADS recovery periods for property not listed above can be found in the tables in Appendix B.

Placed-in-Service Date

As discussed in chapter 1, property is placed in service when it is ready and available for a specific use. Depreciation begins when you place your property in service in a trade or business or for the production of income. If you place property in service for personal use, you cannot claim depreciation. If you change the property use to a business or income-producing activity, you begin to depreciate it at the time of the change in use.

Example 1. Donald Steep bought a machine for his business. The machine was delivered last year. However, it was not installed and operational until this year. It is considered placed in service this year. If the machine had been ready and available for use when it was delivered, it would be considered placed in service last year even if it was not actually used until this year.

Example 2. On April 6, Sue Thorn bought a house to use as residential rental property. She made several repairs and had it ready for rent on July 5. At that time, she began to advertise it for rent in the local newspaper. The house is considered placed in service in July when it was ready and available for rent. She can begin to depreciate it in July.

Example 3. James Elm is a building contractor who specializes in constructing office buildings. He bought a truck last year that had to be modified to lift materials to second-story levels. The installation of the lifting equipment was completed and James accepted delivery of the modified truck on January 10 of this year. The truck was placed in service on January 10, the date it was ready and available to perform the function for which it was bought.

MACRS Property Acquired by an Exchange or Involuntary Conversion

If, after January 2, 2000, you placed in service MACRS property that was acquired in a like-kind exchange or an involuntary conversion for other MACRS property, you generally depreciate the acquired property over the remaining recovery period of the exchanged or involuntarily converted MACRS property. You also generally continue to use the same depreciation method and convention of the exchanged or involuntarily converted property. Any excess of the basis in the acquired MACRS property over the adjusted basis in the exchanged or involuntarily converted MACRS property is depreciated as newly purchased MACRS property. However, if land or other non-depreciable property is acquired in an exchange or an involuntary conversion for depreciable property, you cannot depreciate the land or other non-depreciable property. For more information on like-kind exchanges and involuntary conversions, see chapter 1 in Publication 544.

If you acquired MACRS property in a like-kind exchange or in an involuntary conversion for other MACRS property and you placed the acquired property in service before January 3, 2000, you can continue to use your present method of depreciating that property. However, if you treated the acquired property as newly purchased property, you can change your method of accounting for that property and depreciate it using the rules for property acquired and placed in service after January 2, 2000. See Form 3115 for information on changing your method of accounting.

Conventions

Words you may need to know (see Glossary):

• Basis
• Clean-fuel vehicle
• Clean-fuel vehicle refueling property
• Disposed
• Nonresidential real property
• Placed in service
• Residential rental property

To figure your depreciation deduction for both the year in which you place property in service and the year in which you dispose of the property, you use one of the following conventions.

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

The Half-Year Convention

Under the half-year 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 no matter when in the year you begin or end the use of the property, you treat it as if you began or ended its use in the middle of the year. Generally, you use the half-year convention for property other than nonresidential real and residential rental property. In certain circumstances, you may have to use the mid-quarter convention (discussed later).

The Mid-Month Convention

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 no matter when during a month you place property in service or dispose of it, you treat it as being placed in service or disposed of in the middle of the month.

You use the mid-month convention for the following types of property.

• Nonresidential real property.
• Residential rental property.

The Mid-Quarter Convention

Under the mid-quarter 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 quarter. This means that no matter when during a quarter you place property in service or dispose of it, you treat it as being placed in service or disposed of in the middle of the quarter.

You must use the mid-quarter convention when the total depreciable bases of MACRS property you placed in service during the last three months of your tax year are more than 40% of the total depreciable bases of all MACRS property you placed in service during the entire year. When that happens, you must use this convention for all MACRS property you placed in service during the year. To determine the total bases of property, do not include the following.

• Nonresidential real property.
• Residential rental property.
• Property you placed in service and disposed of in the same year.

To determine whether you must use the mid-quarter convention, the depreciable basis of property is your basis multiplied by the percentage of business/investment use and then reduced by the following.

• Any amortization taken on the property.
• Any section 179 deduction claimed on the property.
• Any deduction claimed for clean-fuel vehicles or for clean-fuel vehicle refueling property.

Depreciation Methods

Words 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

The three methods used to figure depreciation under MACRS are 200% declining balance, 150% declining balance, and straight line. Depending on the property being depreciated, all three methods can be used under GDS. Only the straight line method can be used under ADS. GDS recovery periods are generally shorter than the ADS recovery periods.

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

Electing a Different Method

As shown in the table Depreciation Methods, you can elect a different method for depreciation for certain types of property. You must make the election by the due date of the return (including extensions) for the year you placed the property in service. However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within six 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 in 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 II of Form 4562.

For property placed in service before 1999, you could have elected to use the 150% declining balance method using the ADS recovery periods. If you made this election, continue to use the same method and recovery period for that property.

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 "SL" under column (f) in Part II of Form 4562.

Election of ADS. Although your property may come under GDS, you can elect to use ADS. 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 ADS Recovery Periods, earlier.

Make the election by completing line 16 in Part II of Form 4562.

Farm property. Instead of using the 150% declining balance rate over a GDS recovery period for property you use in a farming business, 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 the ADS recovery period.

Depreciation Methods for Farm Property

If you place personal property in service in a farming business after 1988, you can depreciate it under GDS using any method other than the 200% declining balance method. You can depreciate real property using the straight line method under either GDS or ADS.

For a quick reference to the MACRS methods, see the table Depreciation Methods, earlier.

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

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

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

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.

MACRS Percentage Tables

Words you may need to know (see Glossary):

• Adjusted basis
• Amortization
• Basis
• Business/investment use
• Convention
• Placed in service
• Property class
• Recovery period

Appendix A near the end of this publication contains percentage tables you can use to figure your depreciation under MACRS.

Rules Covering the Use of the Tables

The following rules cover the use of the percentage tables.

1. You must apply the rates in the percentage tables to your property's unadjusted basis.
2. You cannot use the percentage tables for a short tax year. See MACRS Deduction in Short Tax Year, later for information on figuring the deduction.
3. Once you start using the percentage tables, you must continue to use them for the entire recovery period of the property.
4. If you adjust the basis of the property for any reason other than those listed in (a) and (b), you must stop using the tables.
   1. Depreciation allowed or allowable.
   2. An addition or improvement to that property that is depreciated as a separate item of property.

Figuring unadjusted basis. You must apply the table rates to your property's unadjusted basis each year of the recovery period. Unadjusted basis is the same amount you would use to figure gain on a sale, but you figure it without taking into account any depreciation taken in earlier years. However, you do reduce your original basis by any of the following that apply.

• Any amortization taken on the property.
• Any section 179 deduction claimed.
• Any deduction claimed for clean-fuel vehicle or clean-fuel vehicle refueling property.
• Any electric vehicle credit. (This is the lesser of $4,000 or 10% of the cost of the vehicle, even if the credit is less than that amount.)

For business property you purchase during the year, the unadjusted basis is its cost minus these adjustments.

If you trade property, your unadjusted basis in the property received is the cash paid plus the adjusted basis of the property traded minus these adjustments.

The deductions for clean-fuel vehicles or clean-fuel vehicle refueling property and any electric vehicle credit are subject to recapture. If the property is depreciable, and you must recapture part or all of the deduction or credit, you can increase the basis of the property by the amount of the deduction or credit recaptured. You can recover the additional basis over the rest of the recovery period beginning with the year of recapture. However, if this occurs, you will no longer be able to use the percentage tables. Instead, for the year of adjustment and the remaining recovery period, you must figure the depreciation using the property's adjusted basis at the end of the year. To determine your depreciation without the tables, see How To Figure the Deduction Without Using the Tables, later.

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

Adjustment due to casualty loss. If you reduce the basis of your property because of a casualty, you cannot continue to use the tables. For the year of adjustment and the rest of the recovery period, figure the depreciation using the property's adjusted basis at the end of the year of adjustment.

Example. On October 26, 1999, Sandra Elm, a calendar year taxpayer, bought and placed in service in her business an item of 7-year property. It cost $29,000 and she elected a section 179 deduction of $19,000. Her unadjusted basis after the section 179 deduction was $10,000. Because it was the only item placed in service that year and it was placed in service during the last 3 months of the year, she used the mid-quarter convention. Because the property has a 7-year recovery period she figured her deduction using the percentages in Table A-5. For 1999, her depreciation was $357 ($10,000 x 3.57%).

In July 2000, her property was vandalized and Sandra had a deductible casualty loss of $3,000. Because she must adjust her property's basis for the casualty loss, she can no longer use the percentage tables. Her adjusted basis at the end of 2000, before figuring her 2000 depreciation, is $6,643. She figures the adjusted basis by subtracting the 1999 depreciation of $357 and the casualty loss of $3,000 from the unadjusted basis of $10,000. She can now figure her depreciation for 2000 without using the percentage tables.

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 MACRS percentage tables immediately follow the guide.

MACRS Worksheet

This worksheet is intended only to help you and does not replace Form 4562. Use the information from this worksheet to prepare Form 4562. Also, use a separate worksheet for each item of property. Part I is used to record information you will need to figure your deduction in Part II.

Do not use this worksheet for automobiles. Use the Worksheet for Passenger Automobiles in chapter 4.

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, 2000. You use the furniture only for business. You did not elect a section 179 deduction. You use GDS under MACRS and the half-year convention to figure your depreciation. This is the only property you placed in service this year. You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. Because you did not elect a section 179 deduction, your property's unadjusted basis is its cost, $10,000. 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.

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.

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 the building cost $100,000 and the land cost $20,000. It is nonresidential real property. You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. The building's unadjusted basis is its original cost, $100,000. As discussed earlier, you can never depreciate land.

Because March is the third month of your tax year, 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:

Example 2. During 2000, 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 for any of these items.

Because you placed property in service during the last three months of the year, you must first determine if you have to use the mid-quarter convention. The total bases of all property you placed in service in 2000 is $10,000. Because the basis of the computer ($5,000), 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 2000, 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. Because the machine is 7-year property placed in service in the first quarter, you use Table A-2. Because the furniture is 7-year property placed in service in the third quarter, 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.

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