Table of Contents
- Introduction
- What Is Qualified Property?
- Qualified Liberty Zone Property
- Qualified Gulf Opportunity Zone Property
- Qualified Cellulosic Biomass Ethanol Plant Property
- Qualified Recovery Assistance Property
- Qualified Reuse and Recycling Property
- Qualified Cellulosic Biofuel Plant Property
- Qualified Disaster Assistance Property
- Certain Qualified Property Acquired After December 31, 2007
- Election to Accelerate Certain Credits in Lieu of the Special Depreciation Allowance
- How Much Can You Deduct?
- How Can You Elect Not To Claim an Allowance?
- When Must You Recapture an Allowance?
You can take a special depreciation allowance to recover part of the cost of qualified property (defined next), placed in service during the tax year. The allowance applies only for the first year you place the property in service. For qualified property placed in service in 2008, you can take an additional 50% (or 30%, if applicable) special allowance. The allowance is an additional deduction you can take after any section 179 deduction and before you figure regular depreciation under MACRS for the year you place the property in service.
This chapter explains what is qualified property. It also includes rules regarding how to figure an allowance, how to elect not to claim an allowance, and when you must recapture an allowance.
Corporations and certain automotive partnerships can elect to accelerate certain research and minimum tax credits in lieu of claiming the special depreciation allowance for eligible qualified property. See Election to Accelerate Certain Credits in Lieu of the Special Depreciation Allowance on page 35.See chapter 6 for information about getting publications and forms.
Your property is qualified property if it is one of the following.
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Qualified Liberty Zone property.
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Qualified Gulf Opportunity Zone (GO Zone) property.
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Qualified cellulosic biomass ethanol plant property.
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Qualified Recovery Assistance property.
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Qualified reuse and recycling property.
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Qualified cellulosic biofuel plant property.
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Qualified disaster assistance property.
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Certain qualified property placed in service after December 31, 2007, and before January 1, 2010.
The following discussions provide information about the types of qualified property listed above for which you can take the special depreciation allowance.
You can take a special depreciation allowance for qualified Liberty Zone property that is nonresidential real or residential rental property (defined next).
To be qualified Liberty Zone property, the property must also meet all of the following tests.
September 10, 2001. Used property can be qualified Liberty Zone property if it has not previously been used within the Liberty Zone. Also, additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test if the original use of the property in the Liberty Zone began with you. However, the cost of reconditioned or rebuilt property you acquired does not meet this test. Property containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20% of the total cost of the property. If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after you originally placed the property in service, the lessor is considered to be the original user of the property. For special rules identifying the original user of property involved in certain other transactions and the original user of fractional interests in property, see section 1.168(k)-1(b)(3) of the regulations.
Qualified Liberty Zone property does not include any of the following.
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Property placed in service and disposed of in the same tax year.
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Property converted from business use to personal use in the same tax year it is acquired. Property converted from personal use to business use in the same or later tax year may be qualified Liberty Zone property.
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Property that also qualified for the special depreciation allowance.
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Property required to be depreciated using the Alternative Depreciation System (ADS). This includes listed property used 50% or less in a qualified business use. For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies, in chapter 4.
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Property for which you elected not to claim any special depreciation allowance (discussed later).
You can take a special depreciation allowance for qualified Gulf Opportunity Zone (GO Zone) property that is nonresidential real and residential rental property. Qualified GO Zone property also includes specified GO Zone extension property (defined later). Qualified GO Zone property must meet certain tests, explained under Other Tests To Be Met on page 27. Also, qualified GO Zone property cannot be excepted property, explained under Excepted Property on page 28.
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Nonresidential real property or residential rental property placed in service in specified portions of the GO Zone (discussed below) before January 1, 2011, or
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Any of the following types of property placed in service in a building described above before January 1, 2011.
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Tangible property depreciated under the modified accelerated recovery system (MACRS) with a recovery period of 20 years or less. See Which Method Can You Use To Depreciate Your Property in chapter 1.
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Water utility property, which is either (a) 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 or (b) any municipal sewer.
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Computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS.
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Qualified leasehold improvement property, defined below.
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The improvement is made under or according to a lease by the lessee (or any sublessee) or the lessor of that part of the building.
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That part of the building is to be occupied exclusively by the lessee (or any sublessee) of that part.
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The improvement is placed in service more than 3 years after the date the building was first placed in service by any person.
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The improvement is section 1250 property. See chapter 3 in Publication 544, Sales and Other Dispositions of Assets, for the definition of section 1250 property.
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The enlargement of the building.
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Any elevator or escalator.
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Any structural component benefiting a common area.
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The internal structural framework of the building.
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Members of an affiliated group.
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An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister, ancestor, and lineal descendant.
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A corporation and an individual who directly or indirectly owns 80% or more of the value of the outstanding stock of that corporation.
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Two corporations that are members of the same controlled group.
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A trust fiduciary and a corporation if 80% or more of the value of the outstanding stock is directly or indirectly owned by or for the trust or grantor of the trust.
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The grantor and fiduciary, and the fiduciary and beneficiary, of any trust.
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The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts.
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A tax-exempt educational or charitable organization and any person (or, if that person is an individual, a member of that person's family) who directly or indirectly controls the organization.
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Two S corporations, and an S corporation and a regular corporation, if the same persons own 80% or more of the value of the outstanding stock of each corporation.
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A corporation and a partnership if the same persons own both of the following.
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80% or more of the value of the outstanding stock of the corporation.
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80% or more of the capital or profits interest in the partnership.
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The executor and beneficiary of any estate.
To be qualified GO Zone property, the property must also meet all of the following tests.
Qualified GO Zone property does not include any of the following.
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Property required to be depreciated using the Alternative Depreciation System (ADS). This includes listed property used 50% or less in a qualified business use. For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies, in chapter 4.
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Property any portion of which is financed with the proceeds of a tax-exempt obligation under section 103 of the Internal Revenue Code.
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Any qualified revitalization building (described below) for which you have elected to claim a commercial revitalization deduction for qualified revitalization expenditures.
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Any property used in connection with any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, or any store, the principal business of which is the sale of alcoholic beverages for consumption off premises.
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Any gambling or animal racing property (defined below).
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Property for which you elected not to claim any special depreciation allowance (discussed later).
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Property placed in service and disposed of in the same tax year.
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Property converted from business use to personal use in the same tax year it is acquired. Property converted from personal use to business use in the same or later tax year may be qualified GO Zone property.
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Other bonus depreciation property to which section 168(k) of the Internal Revenue Code applies.
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Any equipment, furniture, software, or other property used directly in connection with gambling, the racing of animals, or the on-site viewing of such racing.
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Any real property determined by square footage (other than any portion that is less than 100 square feet) that is dedicated to gambling, the racing of animals, or the on-site viewing of such racing.
You can take a special depreciation allowance for qualified cellulosic biomass ethanol plant property. Cellulosic biomass ethanol means ethanol produced by hydrolysis of any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis. Examples include bagasse (from sugar cane), corn stalks, and switchgrass. The property must meet the following requirements.
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The property is used in the United States solely to produce cellulosic biomass ethanol.
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The original use of the property must begin with you after December 20, 2006.
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You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2) after December 20, 2006, with no binding written contract for the acquisition in effect before December 21, 2006.
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The property must be placed in service for use in your trade or business or for the production of income before January 1, 2013.
Qualified cellulosic biomass ethanol plant property does not include any of the following.
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Property placed in service and disposed of in the same tax year.
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Property converted from business use to personal use in the same tax year it is acquired. Property converted from personal use to business use in the same or later tax year may be qualified cellulosic biomass ethanol plant property.
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Property required to be depreciated using the Alternative Depreciation System (ADS). For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies, in chapter 4.
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Property any portion of which is financed with the proceeds of any obligation the interest on which is exempt from tax under section 103 of the Internal Revenue Code.
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Property for which you elected not to claim any special depreciation allowance (discussed later).
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Property for which a deduction was taken under section 179C for certain qualified refinery property.
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Other bonus depreciation property to which section 168(k) of the Internal Revenue Code applies.
You can take a special depreciation allowance for qualified Recovery Assistance property you acquired after May 4, 2007, and placed in service in the Kansas disaster area. The Kansas disaster area is generally located in Kiowa County, Kansas, and surrounding areas. For a complete list of the affected areas, see Pub. 4492-A. Your property is qualified Recovery Assistance property if it meets the following requirements.
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It is one of the following types of property.
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Tangible property depreciated under MACRS with a recovery period of 20 years or less.
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Water utility property, which is either of the following.
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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.
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Any municipal sewer.
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Computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS.)
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Qualified leasehold improvement property (defined under Qualified leasehold improvement property, on page 27).
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Nonresidential real property and residential rental property.
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It is property that meets certain tests (explained next under Other Tests To Be Met).
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It is not excepted property (explained under Excepted Property on page 30).
To be qualified Recovery Assistance property, the property must also meet all of the following tests.
Qualified Recovery Assistance property does not include any of the following.
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Property required to be depreciated using the Alternative Depreciation System (ADS). For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies, in chapter 4.
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Property any portion of which is financed with the proceeds of a tax-exempt obligation under section 103 of the Internal Revenue Code.
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Any qualified revitalization building (defined earlier under Qualified revitalization building on page 28) for which you have elected to claim a commercial revitalization deduction for qualified revitalization expenditures.
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Property for which you elected not to claim any special depreciation allowance (discussed later).
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Property placed in service and disposed of in the same tax year.
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Property converted from business use to personal use in the same tax year acquired. Property converted from personal use to business use in the same or later tax year may be qualified Recovery Assistance property.
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Other bonus depreciation property to which section 168(k) of the Internal Revenue Code applies.
You can take a special depreciation allowance for qualified reuse and recycling property. Qualified reuse and recycling property is any machinery or equipment (not including buildings or real estate), along with any appurtenance, that is used exclusively to collect, distribute, or recycle qualified reuse and recyclable materials (as defined in section 168(m)(3)(B) of the Internal Revenue Code). Qualified reuse and recycling property also includes software necessary to operate such equipment. The property must meet the following requirements.
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The property must be depreciated under MACRS.
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The property must have a useful life of at least 5 years.
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The original use of the property must begin with you after August 31, 2008.
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You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2) after August 31, 2008, with no binding written contract for the acquisition in effect before September 1, 2008.
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The property must be placed in service for use in your trade or business after August 31, 2008.
Qualified reuse and recycling property does not include any of the following.
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Any rolling stock or other equipment used to transport reuse or recyclable materials.
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Property required to be depreciated using the Alternative Depreciation System (ADS). For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies, in chapter 4.
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Other bonus depreciation property to which section 168(k) of the Internal Revenue Code applies.
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Property for which you elected not to claim any special depreciation allowance (discussed later).
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Property placed in service and disposed of in the same tax year.
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Property converted from business use to personal use in the same tax year acquired. Property converted from personal use to business use in the same or later tax year may be qualified reuse and recycling property.
You can take a special depreciation allowance for qualified cellulosic biofuel plant property. Cellulosic biofuel is any liquid fuel which is produced from any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis. Examples include bagasse (from sugar cane), corn stalks, and switchgrass. The property must meet the following requirements.
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The property is used in the United States solely to produce cellulosic biofuel.
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The original use of the property must begin with you after December 20, 2006.
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You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2) after December 20, 2006, with no binding written contract for acquisition in effect before December 21, 2006.
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The property must be placed in service for use in your trade or business or for the production of income after October 3, 2008, and before January 1, 2013.
Qualified cellulosic biofuel plant property does not include any of the following.
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Property placed in service and disposed of in the same tax year.
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Property converted from business use to personal use in the same tax year it is acquired. Property converted from personal use to business use in the same or later tax year may be qualified cellulosic biomass ethanol plant property.
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Property required to be depreciated using the Alternative Depreciation System (ADS). For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies, in chapter 4.
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Property any portion of which is financed with the proceeds of any obligation the interest on which is exempt from tax under section 103 of the Internal Revenue Code.
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Property for which you elected not to claim any special depreciation allowance (discussed later).
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Property for which a deduction was taken under section 179C for certain qualified refinery property.
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Other bonus depreciation property to which section 168(k) of the Internal Revenue Code applies.
You can take a special depreciation allowance for qualified disaster assistance property placed in service in federally declared disaster areas in which the disaster occurred after December 31, 2007. A list of the federally declared disaster areas is available at the FEMA website at www.fema.gov. Your property is qualified disaster assistance property if it meets the following requirements.
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It is one of the following types of property.
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Tangible property depreciated under MACRS with a recovery period of 20 years or less.
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Water utility property.
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Computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS.)
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Qualified leasehold improvement property (defined under Qualified leasehold improvement property on page 27).
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Nonresidential real property and residential rental property.
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You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2) on or after the applicable disaster date, with no binding written contract for the acquisition in effect before the applicable disaster date.
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The property must rehabilitate property damaged, or replace property destroyed or condemned, as a result of the applicable federally declared disaster.
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The property must be similar in nature to, and located in the same county as, the rehabilitated or replaced property.
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The original use of the property within the applicable disaster area must have begun with you on or after the applicable disaster date.
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The property is placed in service by you on or before the date which is the last day of the third calendar year following the applicable disaster date (the fourth calendar year in the case of nonresidential real property and residential rental property).
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Substantially all (80% or more) of the use of the property must be in the active conduct of your trade or business in a federally declared disaster area, occurring before January 1, 2010.
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It is not excepted property (explained later in Excepted Property).
Qualified disaster assistance property does not include any of the following.
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Property required to be depreciated using the Alternative Depreciation System (ADS). For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies, in chapter 4.
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Property any portion of which is financed with the proceeds of a tax-exempt obligation under section 103 of the Internal Revenue Code.
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Any qualified revitalization building (defined earlier under Qualified revitalization building on page 28) for which you have elected to claim a commercial revitalization deduction for qualified revitalization expenditures.
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Any property used in connection with any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, or any store, the principal business of which is the sale of alcoholic beverages for consumption off premises.
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Any property for which the special allowance under section 168(k) or section 1400N(d) of the Internal Revenue Code applies.
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Property for which you elected not to claim any special depreciation allowance (discussed later).
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Property placed in service and disposed of in the same tax year.
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Property converted from business use to personal use in the same tax year acquired. Property converted from personal use to business use in the same or later tax year may be qualified disaster assistance property.
You can take a special depreciation deduction allowance for certain qualified property acquired after December 31, 2007. Your property is qualified property if it meets the following requirements.
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It is one of the following types of property.
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Tangible property depreciated under MACRS with a recovery period of 20 years or less.
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Water utility property.
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Computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS.)
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Qualified leasehold improvement property (defined under Qualified leasehold improvement property on page 27).
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You must have acquired the property by purchase after December 31, 2007, with no binding written contract for the acquisition of in effect before January 1, 2008.
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The property must be placed in service for use in your trade or business or for the production of income before January 1, 2010 (before January 1, 2011, for certain property with a long production period and certain aircraft (defined next)).
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The original use of the property must begin with you after December 31, 2007.
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It is not excepted property (explained later in Excepted Property).
To be qualified property, long production period property must meet the following requirements.
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It must meet the requirements of (2)–(5), above.
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The property has a recovery period of at least 10 years or is transportation property. Transportation property is tangible personal property used in the trade or business of transporting persons or property.
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The property is subject to section 263A of the Internal Revenue Code.
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The property has an estimated production period exceeding 1 year and an estimated production cost exceeding $1,000,000.
To be qualified property, noncommercial aircraft must meet the following requirements.
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It must meet the requirements in (2)-(5), above.
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The aircraft must not be tangible personal property used in the trade or business of transporting persons or property (except for agricultural or firefighting purposes).
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The aircraft must be purchased (as discussed under Property Acquired by Purchase in chapter 2) by a purchaser who at the time of the contract for purchase, makes a nonrefundable deposit of the lesser of 10% of the cost or $100,000.
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The aircraft must have an estimated production period exceeding four months and a cost exceeding $200,000.
Qualified property does not include any of the following.
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Property placed in service and disposed of in the same tax year.
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Property converted from business use to personal use in the same tax year acquired. Property converted from personal use to business use in the same or later tax year may be qualified property.
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Property required to be depreciated under the Alternative Depreciation System (ADS). This includes listed property used 50% or less in a qualified business use. For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies, in Chapter 4.
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Qualified restaurant property (as defined in section 168(e)(7) of the Internal Revenue Code) placed in service after December 31, 2008.
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Qualified retail improvement property (as defined in section 168(e)(8) of the Internal Revenue Code) placed in service after December 31, 2008.
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Property for which you elected not to claim any special depreciation allowance (discussed later).
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Property for which you elected to accelerate certain credits in lieu of the special depreciation allowance (discussed next).
Corporations and certain automotive partnerships can elect to accelerate pre-2006 unused research credits or minimum tax credits in lieu of claiming the special depreciation allowance for certain eligible qualified property (as defined in section 168(k)(4)(D) of the Internal Revenue Code). Generally, this election applies to eligible property acquired after March 31, 2008, and placed in service before January 1, 2010 (before January 1, 2011, for long production period property and noncommercial aircraft (defined above)).
If you make an election to accelerate these credits in lieu of claiming the special depreciation allowance for eligible property, you must not take the 50% special depreciation allowance for the property and must depreciate the basis in the property under MACRS using the straight line method. See Which Depreciation Method Applies in chapter 4.
Once made, the election cannot be revoked without IRS consent.
Figure the special depreciation allowance by multiplying the depreciable basis of the qualified property by 50% (or 30% if applicable). For qualified Liberty Zone property, multiply the depreciable basis by 30%. For qualified GO Zone property, qualified cellulosic biomass ethanol plant property, qualified Recovery Assistance property, qualified reuse and recycling property, qualified cellulosic biofuel plant property, qualified disaster assistance property, and certain qualified property acquired after December 31, 2007, and generally placed in service before January 1, 2010, multiply the depreciable basis by 50%.
For qualified property other than listed property, enter the special allowance on line 14 in Part II of Form 4562. For qualified property that is listed property, enter the special allowance on line 25 in Part V of Form 4562.
If you place qualified property in service in a short tax year, you can take the full amount of a special depreciation allowance.-
Any section 179 deduction.
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Any deduction for removal of barriers to the disabled and the elderly.
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Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services.
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Basis adjustment to investment credit property under section 50(c) of the Internal Revenue Code.
Example 1.
On November 1, 2008, Tom Brown bought and placed in service in his business qualified Recovery Assistance property that cost $450,000. He did not elect to claim a section 179 deduction. He deducts 50% of the cost ($225,000) as a special depreciation allowance for 2008. He uses the remaining $225,000 of cost to figure his regular MACRS depreciation deduction for 2008 and later years.
Example 2.
The facts are the same as in Example 1, except that Tom elects to deduct $325,000 ($250,000 + the increased dollar limit of $100,000 for qualified Recovery Assistance property) of the property's cost as a section 179 deduction. He uses the remaining $125,000 of cost to figure his special depreciation allowance of $62,500 ($125,000 × 50%). He uses the remaining $62,500 of cost to figure his regular MACRS depreciation deduction for 2008 and later years.
You can elect, for any class of property, not to deduct any special allowances for all property in such class placed in service during the tax year.
To make an election, attach a statement to your return indicating what election you are making and the class of property for which you are making the election.
When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable. See When Do You Recapture MACRS Depreciation in chapter 4 for more information.
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