Small Business Taxes & Management

Federal Depreciation Rates

 

Small Business Taxes & ManagementTM--Copyright 2014, A/N Group, Inc.

 

Contents

Section 179 Expense Limit

MACRS Rates--Half-Year Convention

Residential Real Property--27.5 years

Nonresidential Real Property--39 years

50% Bonus Depreciation

Comprehensive Examples

 

MACRS Rates--Mid-Quarter Convention

For property placed in service in the:

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

 

Maximum Section 179 Expense Deduction

              Tax Year             Amount        Phaseout Begins

		2014              $500,000        $2,000,000
                2013               500,000         2,000,000
                2012               500,000         2,000,000
                2011               500,000         2,000,000
                2010               500,000         2,000,000
                2009               250,000           800,000
                2008               250,000           800,000
                2007               125,000           500,000
                2006               108,000           430,000
                2005               105,000           420,000
                2004               102,000           410,000
                               

Note. The Sec. 179 deduction reverts by law to a maximum of $25,000 for taxable years beginning after 2014. (That's calendar year 2015 and subsequent years for most taxpayers.) The phaseout drops to $200,000. It's expected that the deduction and phaseout will be increased substantially with any tax law changes or an extender package.

Note. An increased Sec. 179 deduction is available to enterprise zone businesses and renewal community business in certain situations. In addition, an increased Sec. 179 deduction is available for certain Sec. 179 Disaster Assistance property. Check the rules in place at the time the property is placed in service. Finally, the maximum deduction for heavy sport utility vehicles and certain other vehicles is restricted to $25,000.

 

Table 1: MACRS Rates--Half-Year Convention

Recovery Period
          
       Year     3 years     5 years     7 years     10 years     15 years      20 years
         1       33.33%      20.00%      14.29%      10.00%        5.00%        3.750%
         2       44.45%      32.00%      24.49%      18.00%        9.50%        7.219%
         3       14.81%      19.20%      17.49%      14.40%        8.55%        6.677%
         4        7.41%      11.52%      12.49%      11.52%        7.70%        6.177%
         5                   11.52%       8.93%       9.22%        6.93%        5.713%
         6                    5.76%       8.92%       7.37%        6.23%        5.285%
         7                                8.93%       6.55%        5.90%        4.888%
         8                                4.46%       6.55%        5.90%        4.522%
         9                                            6.56%        5.91%        4.462%
        10                                            6.55%        5.90%        4.461%
        11                                            3.28%        5.91%        4.462%
        12                                                         5.90%        4.461%
        13                                                         5.91%        4.462%
        14                                                         5.90%        4.461%
        15                                                         5.91%        4.462%
	16                                                         2.95%        4.461%
        17                                                                      4.462%
        18                                                                      4.461%
        19                                                                      4.462%
        20                                                                      4.461%
        21                                                                      2.231%
Caution--Please see notes and examples below.

 

Table 2: MACRS Rates--Mid-Quarter Convention--First Quarter

Recovery Period
          
       Year     3 years     5 years     7 years     10 years     15 years
         1       58.33%      35.00%      25.00%      17.50%        8.75%
         2       27.78%      26.00%      21.43%      16.50%        9.13%
         3       12.35%      15.60%      15.31%      13.20%        8.21%
         4        1.54%      11.01%      10.93%      10.56%        7.39%
         5                   11.01%       8.75%       8.45%        6.65%
         6                    1.38%       8.74%       6.76%        5.99%
         7                                8.75%       6.55%        5.90%
         8                                1.09%       6.55%        5.91%
         9                                            6.56%        5.90%
        10                                            6.55%        5.91%
        11                                            0.82%        5.90%
        12                                                         5.91%
        13                                                         5.90%
        14                                                         5.91%
        15                                                         5.90%
        16                                                         0.74%

 

Table 3: MACRS Rates--Mid-Quarter Convention--Second Quarter

Recovery Period
          
       Year     3 years     5 years     7 years     10 years     15 years
         1       41.67%      25.00%      17.85%      12.50%        6.25%
         2       38.89%      30.00%      23.47%      17.50%        9.38%
         3       14.14%      18.00%      16.76%      14.00%        8.44%
         4        5.30%      11.37%      11.97%      11.20%        7.59%
         5                   11.37%       8.87%       8.96%        6.83%
         6                    4.26%       8.87%       7.17%        6.15%
         7                                8.87%       6.55%        5.91%
         8                                3.33%       6.55%        5.90%
         9                                            6.56%        5.91%
        10                                            6.55%        5.90%
        11                                            2.46%        5.91%
        12                                                         5.90%
        13                                                         5.91%
        14                                                         5.90%
        15                                                         5.91%
        16                                                         2.21%
 

Table 4: MACRS Rates--Mid-Quarter Convention--Third Quarter

Recovery Period
          
       Year     3 years     5 years     7 years     10 years     15 years
         1       25.00%      15.00%      10.71%       7.50%        3.75%
         2       50.00%      34.00%      25.51%      18.50%        9.63%
         3       16.67%      20.40%      18.22%      14.80%        8.66%
         4        8.33%      12.24%      13.02%      11.84%        7.80%
         5                   11.30%       9.30%       9.47%        7.02%
         6                    7.06%       8.85%       7.58%        6.31%
         7                                8.86%       6.55%        5.90%
         8                                5.53%       6.55%        5.91%
         9                                            6.56%        5.90%
        10                                            6.55%        5.90%
        11                                            4.10%        5.91%
        12                                                         5.90%
        13                                                         5.91%
        14                                                         5.90%
        15                                                         5.91%
        16                                                         3.69%

Table 5: MACRS Rates--Mid-Quarter Convention--Fourth Quarter

Recovery Period
          
       Year     3 years     5 years     7 years     10 years     15 years
         1        8.33%       5.00%       3.57%       2.50%        1.25%
         2       61.11%      38.00%      27.55%      19.50%        9.88%
         3       20.37%      22.80%      19.68%      15.60%        8.89%
         4       10.19%      13.68%      14.06%      12.48%        8.00%
         5                   10.94%      10.04%       9.98%        7.20%
         6                    9.58%       8.73%       7.99%        6.48%
         7                                8.73%       6.55%        5.90%
         8                                7.64%       6.55%        5.90%
         9                                            6.56%        5.90%
        10                                            6.55%        5.91%
        11                                            5.74%        5.90%
        12                                                         5.91%
        13                                                         5.90%
        14                                                         5.91%
        15                                                         5.90%
        16                                                         5.17%
 

Table 6: Residential Real Property--27.5 Years

Recovery Period
 Month Placed                       Year
  in Service     1     2-9      10      11      12   13-27    28     29
      1      3.485%   3.636%  3.637%  3.636%  3.637%   *    1.970%   --
      2      3.182%   3.636%  3.637%  3.636%  3.637%   *    2.273%   --
      3      2.879%   3.636%  3.637%  3.636%  3.637%   *    2.576%   --
      4      2.576%   3.636%  3.637%  3.636%  3.637%   *    2.879%   --
      5      2.273%   3.636%  3.637%  3.636%  3.637%   *    3.182%   --
      6      1.970%   3.636%  3.637%  3.636%  3.637%   *    3.485%   --
      7      1.667%   3.636%  3.637%  3.636%  3.637%   *    3.636%  0.152%
      8      1.364%   3.636%  3.637%  3.636%  3.637%   *    3.636%  0.455%
      9      1.061%   3.636%  3.637%  3.636%  3.637%   *    3.636%  0.758%
     10      0.758%   3.636%  3.637%  3.636%  3.637%   *    3.636%  1.061%
     11      0.455%   3.636%  3.637%  3.636%  3.637%   *    3.636%  1.364%
     12      0.152%   3.636%  3.637%  3.636%  3.637%   *    3.636%  1.667%
*In years 13-27, the rate alternates between 3.636% and 3.637%.

Residential property is property rented out for nontransient living purposes.

 

Table 7: Nonresidential Real Property--39 Years

Recovery Period
 Month Placed                       Year
  in Service           1            2-39           40
      1             2.461%         2.564%        0.107%
      2             2.247%         2.564%        0.321%
      3             2.033%         2.564%        0.535%
      4             1.819%         2.564%        0.749%
      5             1.605%         2.564%        0.963%
      6             1.391%         2.564%        1.177%
      7             1.177%         2.564%        1.391%
      8             0.963%         2.564%        1.605%
      9             0.749%         2.564%        1.819%
     10             0.535%         2.564%        2.033%
     11             0.321%         2.564%        2.247%
     12             0.107%         2.564%        2.461%

Nonresidential property includes all property not used for dwelling purposes. That includes offices, stores, warehouses, hotels and motels, etc. It also includes the portion of a home used for business.

 

Notes:

1. Special depreciation limits apply to autos and trucks. A summary of the limits can be found on our Auto and Vehicle Tables page.

2. The rates above (other than for 27.5 and 39-year real property) use the GDS (general depreciation system) and 200% DB (declining balance) method for nonfarm 3-, 5-, 7-, and 10-year property and the GDS using 150% declining balance method for 15- and 20-year property. Farm property with a recovery period of 3-, 5-, 7-, and 10-years is depreciated using the 150% DB method. Certain other properties (e.g. qualified restaurant property) can only be depreciated using certain methods.

3. The mid-quarter convention applies to all property placed in service during the year if more than 40% of the total depreciable basis is placed in service in the fourth quarter of the year. (Real property is excluded from the calculation.)

4. While most taxpayers will use the faster GDS and the 200% DB method, you can elect to use the GDS and the 150% method, GDS and the SL (straight-line) method, or ADS (alternative depreciation system) and the SL method. These methods are slower but may be of interest to certain taxpayers.

5. The 50% bonus depreciation described below generally applies to assets placed in service after December 31, 2007 and before January 1, 2015. (100% bonus depreciation described below generally applies to assets acquired after September 8, 2010 and placed in service before January 1, 2012. 30%/50% bonus depreciation under an earlier law generally expired January 1, 2005.)

6. Many states follow the federal depreciation rules. However, a number of states do not accept some or all of the accelerated depreciation rules and the Section 179 limits. Check the rules for your state.

 

50% Bonus Depreciation

For the years 2008 through 2014 the law provides for 50% or 100% extra depreciation in the first year qualifying property is placed in service. See Note 5, above for qualifying dates. In order for property to qualify for the additional first-year depreciation deduction it must meet all of the following requirements. First, the property must be (1) property to which MACRS applies with an applicable recovery period of 20 years or less, (2) water utility property (as defined in Section 168(e)(5)), (3) computer software other than computer software covered by Section 197, or (4) qualified leasehold improvement property (as defined in Section 168(k)(3)). Second, the original use of the property must commence with the taxpayer (that is, the property must be new). Third, the taxpayer must purchase the property within the applicable time period. Fourth, for listed property (e.g., autos) business use must exceed 50%.

Example --Madison Inc. acquires a special purpose computer for $100,000 on June 5, 2014. Madison claims a $15,000 Section 179 expense option (saving the remainder of the $500,000 expense option for other equipment). Thus, the basis for the bonus depreciation is $85,000. Madison computes the bonus depreciation as $42,500 (50% X $85,000). That leaves a basis for depreciation of $42,500 ($85,000 - $42,500). Since the computer is 5-year property, the first-year depreciation is $8,500 (20% X $42,500). Thus, the total regular and bonus depreciation and Section 179 expense deduction for the first year is $66,000 ($15,000 + $42,500 + 8,500). When using the table, the depreciation basis for future years is $42,500.

Note 1--While there's a limit on the Section 179 expense deduction, there's no comparable limit on the bonus depreciation. In addition, unlike the Section 179 expense option there is no income limitation on bonus depreciation.

Note 2--Bonus depreciation is the default. You can elect out of the 50% bonus depreciation by asset class (5-year property, 7-year property, etc.).

Note 3--There are other rules associated with the bonus depreciation.

 

Comprehensive Examples

Generally, any property placed in service during the course of a year receives a half-year's depreciation under the half-year convention (see table above). However, a special rule applies if you place in service more than 40% of the total basis of property for the year in the last quarter of your fiscal year. That's to avoid waiting until the end of the year to buy the property, yet secure a deduction for the whole year. When calculating the total basis of property placed in service, exclude any on which you took the Section 179 expense election. For real estate, a mid-month convention is used.

Assume in all the examples below that Madison is a calendar-year corporation and that it's been in business for more than a year. To simplify the examples we've ignored any bonus (additional) depreciation or Section 179 expense election.

Example 1--Madison Inc. purchases just two assets in 2011, a computer costing $10,000 on January 15th, and a $5,000 lathe on December 15th. The total dollar amount placed in service is $15,000, $5,000 of which was put in service in the last quarter. Since only 33% of the total was placed in service in the last quarter ($5,000/$15,000), the mid-quarter convention rule does not apply. The table to use is MACRS--Half-Year Convention. The computer has a 5-year life. The rate to use for the first year is 20%. Thus, the depreciation is $2,000 (20% of $10,000). Assume the lathe is 7-year property. The rate is 14.29% and the depreciation for the first year is $714.50 (14.29% of $5,000). For 2008, use the same table, but move down to year 2. The rate for the computer is 32% and the depreciation $3,200 (32% of $10,000). The rate for the lathe is 24.49% and the depreciation $1,224.50 (24.49% of $5,000). Use the same approach for later years.

Example 2--Assume the facts are the same as in the example above, but the lathe costs $7,500. Now the mid-quarter convention applies since the total placed in service during the year is $17,500 and the amount in the last quarter is 42.8% ($7,500/$17,500). You've got to apply the mid-quarter tables to each asset. Use the table corresponding to the quarter the asset was placed in service. The computer was bought in the first quarter. Using Table 2, Mid-Quarter Convention--First Quarter, the rate is 35%; the depreciation for 2007 is $3,500 (35% of $10,000). The lathe was purchased in the fourth quarter so use Table 5, Mid-Quarter Convention--Fourth Quarter (rate is 3.57%). The depreciation for 2007 is $267.75. Use the same tables for 2008, but move down the list to year 2. Thus, for the computer, use 26%. The depreciation for 2008 is $2,600 (26% of $10,000). For the lathe the rate is 27.55%; the depreciation is $2,066.25 (27.55% of $7,500).

Example 3--Assume the facts are the same as in example 2 above, but Madison decides to expense the lathe, using the section 179 expense election. The lathe is no longer counted as an asset placed in service during the year. Madison can now use the mid-year convention for the computer.

Example 4--In April, 2011 Fred buys a small apartment building that has four tenants. The property cost $125,000, $100,000 of which is allocated to the building. The property is residential real property, so Fred has to use Table 6. Since the property is placed in service in April (the 4th month), the depreciation rate for the first year is 2.576%. Thus, the first year's depreciation is $2,576. The rate for the second year is 3.636%, so depreciation for 2012 is $3,636.

Example 5--In July, 2011 Sue buys a small office building. Of the total purchase price, $400,000 is allocated to the building (a portion of the purchase price is allocated to the land). Since the property is placed in service in July, the depreciation rate for the first year is 1.177% (Table 7, nonresidential property). Thus, the first year's depreciation is $4,708 (1.177% of $400,000). The rate for the second year is 2.564%, so depreciation for 2012 is $10,256.

 


Copyright 1998-2014 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject.--ISSN 1089-1536


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Last update--12/18/14