Publication 946
|
3. Claiming the Special Depreciation Allowance (or Liberty Zone Depreciation Allowance)IntroductionYou can take the special depreciation allowance to recover part of the cost of qualified property placed in service during the tax year. Similarly, you can take the special Liberty Zone depreciation allowance for qualified Liberty Zone property placed in service during the tax year. An allowance applies for the year you place the property in service. It is an additional 30% 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. You cannot claim the special Liberty Zone depreciation allowance for property eligible for the special depreciation allowance explained later under What Is Qualified Property. Qualified property is eligible for only one special depreciation allowance. This chapter explains what is qualified property and what is qualified Liberty Zone property. It also covers the rules common to both the special depreciation allowance and the special Liberty Zone depreciation allowance regarding how to figure an allowance, how to elect not to claim it, and when and how to recapture it. Useful ItemsYou may want to see: Form (and Instructions)
See chapter 7 for information about getting publications and forms. What Is Qualified Property? You can take the special depreciation allowance for qualified property. Your property is qualified property if it meets the following requirements.
Qualified leasehold improvement property. Generally, this is any improvement to an interior part of a building that is nonresidential real property, provided all the following requirements are met.
However, a qualified leasehold improvement does not include any improvement for which the expenditure is attributable to any of the following.
Generally, a binding commitment to enter into a lease is treated as a lease and the parties to the commitment are treated as the lessor and lessee. However, a binding commitment between related persons is not treated as a lease. Related persons. For this purpose, the following are related persons.
Tests To Be MetTo be qualified property, the property must meet all of the following tests. Acquisition date test. Generally, you must have acquired the property either:
Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after September 10, 2001, and before September 11, 2004. Placed in service date test. Generally, the property must be placed in service for use in your trade or business or for the production of income after September 10, 2001, and before January 1, 2005. If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service, the property is treated as placed in service no earlier than the date it is used under the leaseback. Original use test. The original use of the property must have begun with you after September 10, 2001. Original use means the first use to which the property is put, whether or not by you. Additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test. Excepted PropertyQualified property does not include any of the following.
Qualified New York Liberty Zone leasehold improvement property. This is any qualified leasehold improvement property (as defined earlier) if all the following requirements are met.
Area defined. The New York Liberty Zone is the area located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with East Broadway) in the Borough of Manhattan in the City of New York, New York. What Is Qualified Liberty Zone Property? You can take the special Liberty Zone depreciation allowance for qualified Liberty Zone property. Your property is qualified Liberty Zone property if it meets the following requirements.
Nonresidential real property and residential rental property. This property is qualifying Liberty Zone property only to the extent it rehabilitates real property damaged, or replaces real property destroyed or condemned, as a result of the terrorist attack of September 11, 2001. Property is treated as replacing destroyed or condemned property if, as part of an integrated plan, such property replaces real property included in a continuous area that includes real property destroyed or condemned. For these purposes, real property is considered destroyed (or condemned) only if an entire building or structure was destroyed (or condemned) as a result of the terrorist attack. Otherwise, the property is considered damaged real property. For example, if certain structural components of a building (such as walls, floors, or plumbing fixtures) are damaged or destroyed as a result of the terrorist attack, but the building is not destroyed (or condemned), then only costs related to replacing the damaged or destroyed structural components qualify for the special Liberty Zone depreciation allowance. Tests To Be MetTo be qualified Liberty Zone property, the property must meet all of the following tests. Acquisition date test. You must have acquired the property by purchase after September 10, 2001, and there must not have been a binding written contract for the acquisition in effect before September 11, 2001. For information on the acquisition of property by purchase, see Property Acquired by Purchase in chapter 2. Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after September 10, 2001. Placed in service date test. Generally, the property must be placed in service for use in your trade or business or for the production of income before January 1, 2007 (January 1, 2010, in the case of qualifying nonresidential real property and residential rental property). If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service, the property is treated as placed in service no earlier than the date it is used under the leaseback. Substantial use test. Substantially all use of the property must be in the Liberty Zone and in the active conduct of your trade or business in the Liberty Zone. Original use test. The original use of the property in the Liberty Zone must have begun with you after 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. Excepted PropertyQualified Liberty Zone property does not include any of the following.
How Much Can You Deduct?
The special depreciation allowance (or Liberty Zone depreciation allowance) for qualified property (or Liberty Zone property) is an additional deduction of 30% of the property's depreciable basis.
Depreciable basis. This is the property's cost or other basis multiplied by the percentage of business/investment use and then reduced by the following items.
For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property? in chapter 1. For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing Activity in chapter 1. Depreciating the remaining cost. After you figure your special depreciation allowance (or Liberty Zone depreciation allowance) for your qualified property (or Liberty Zone property), you can use the remaining cost to figure your regular MACRS depreciation deduction (discussed in chapter 4). In the year you claim the allowance (generally the year you place the property in service), you must reduce the depreciable basis of the property by the allowance before figuring your regular MACRS depreciation deduction. Example 1. On November 1, 2002, Tom Brown bought and placed in service in his business qualified property that cost $100,000. He did not elect to claim a section 179 deduction. He can deduct 30% of the cost ($30,000) as a special depreciation allowance for 2002. He uses the remaining $70,000 of cost to figure his regular MACRS depreciation deduction for 2002 and later years. Example 2. The facts are the same as in Example 1, except that Tom chooses to deduct $24,000 of the property's cost as a section 179 deduction. He uses the remaining $76,000 of cost to figure his special depreciation allowance of $22,800 ($76,000 × 30%). He uses the remaining $53,200 of cost to figure his regular MACRS depreciation deduction for 2002 and later years. - Continue - |