§ 168. Accelerated cost recovery system
(a)
General rule
(b)
Applicable depreciation method
For purposes of this section—
(2)
150 percent declining balance method in certain cases
Paragraph (1) shall be applied by substituting “150 percent” for “200 percent” in the case of—
(3)
Property to which straight line method applies
The applicable depreciation method shall be the straight line method in the case of the following property:
(5)
Election
An election under paragraph (2)(C) or (3)(D) may be made with respect to 1 or more classes of property for any taxable year and once made with respect to any class shall apply to all property in such class placed in service during such taxable year. Such an election, once made, shall be irrevocable.
(c)
Applicable recovery period
For purposes of this section, the applicable recovery period shall be determined in accordance with the following table:
| In the case of: | The applicable recovery period is: |
|---|---|
| 3-year property | 3 years |
| 5-year property | 5 years |
| 7-year property | 7 years |
| 10-year property | 10 years |
| 15-year property | 15 years |
| 20-year property | 20 years |
| Water utility property | 25 years |
| Residential rental property | 27.5 years |
| Nonresidential real property | 39 years. |
| Any railroad grading or tunnel bore | 50 years. |
(d)
Applicable convention
For purposes of this section—
(1)
In general
Except as otherwise provided in this subsection, the applicable convention is the half-year convention.
(3)
Special rule where substantial property placed in service during last 3 months of taxable year
(A)
In general
Except as provided in regulations, if during any taxable year—
(i)
the aggregate bases of property to which this section applies placed in service during the last 3 months of the taxable year, exceed
(ii)
40 percent of the aggregate bases of property to which this section applies placed in service during such taxable year,
the applicable convention for all property to which this section applies placed in service during such taxable year shall be the mid-quarter convention.
(B)
Certain property not taken into account
For purposes of subparagraph (A), there shall not be taken into account—
(i)
any nonresidential real property [1] residential rental property, and railroad grading or tunnel bore, and
(4)
Definitions
(A)
Half-year convention
The half-year convention is a convention which treats all property placed in service during any taxable year (or disposed of during any taxable year) as placed in service (or disposed of) on the mid-point of such taxable year.
(e)
Classification of property
For purposes of this section—
(1)
In general
Except as otherwise provided in this subsection, property shall be classified under the following table:
| Property shall be treated as: | If such property has a class life (in years) of: |
|---|---|
| 3-year property | 4 or less |
| 5-year property | More than 4 but less than 10 |
| 7-year property | 10 or more but less than 16 |
| 10-year property | 16 or more but less than 20 |
| 15-year property | 20 or more but less than 25 |
| 20-year property | 25 or more. |
(2)
Residential rental or nonresidential real property
(A)
Residential rental property
(i)
Residential rental property
The term “residential rental property” means any building or structure if 80 percent or more of the gross rental income from such building or structure for the taxable year is rental income from dwelling units.
(ii)
Definitions
For purposes of clause (i)—
(B)
Nonresidential real property
The term “nonresidential real property” means section
1250 property which is not—
(3)
Classification of certain property
(A)
3-year property
The term “3-year property” includes—
(B)
5-year property
The term “5-year property” includes—
(vi)
any property which—
(I)
is described in subparagraph (A) of section
48
(a)(3) (or would be so described if “solar or wind energy” were substituted for “solar energy” in clause (i) thereof and the last sentence of such section did not apply to such subparagraph),
(II)
is described in paragraph (15) of section
48
(l) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) and is a qualifying small power production facility within the meaning of section 3(17)(C) of the Federal Power Act (16 U.S.C. 796
(17)(C)), as in effect on September 1, 1986, or
(III)
is described in section
48
(l)(3)(A)(ix) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), and
(vii)
any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) which is used in a farming business (as defined in section
263A
(e)(4)), the original use of which commences with the taxpayer after December 31, 2008, and which is placed in service before January 1, 2010.
(C)
7-year property
The term “7-year property” includes—
(D)
10-year property
The term “10-year property” includes—
(E)
15-year property
The term “15-year property” includes—
(ii)
any telephone distribution plant and comparable equipment used for 2-way exchange of voice and data communications,
(iii)
any section
1250 property which is a retail motor fuels outlet (whether or not food or other convenience items are sold at the outlet),
(vii)
any section
1245 property (as defined in section
1245
(a)(3)) used in the transmission at 69 or more kilovolts of electricity for sale and the original use of which commences with the taxpayer after April 11, 2005,
(4)
Railroad grading or tunnel bore
The term “railroad grading or tunnel bore” means all improvements resulting from excavations (including tunneling), construction of embankments, clearings, diversions of roads and streams, sodding of slopes, and from similar work necessary to provide, construct, reconstruct, alter, protect, improve, replace, or restore a roadbed or right-of-way for railroad track.
(5)
Water utility property
The term “water utility property” means property—
(6)
Qualified leasehold improvement property
The term “qualified leasehold improvement property” has the meaning given such term in section
168
(k)(3) except that the following special rules shall apply:
(A)
Improvements made by lessor
In the case of an improvement made by the person who was the lessor of such improvement when such improvement was placed in service, such improvement shall be qualified leasehold improvement property (if at all) only so long as such improvement is held by such person.
(B)
Exception for changes in form of business
Property shall not cease to be qualified leasehold improvement property under subparagraph (A) by reason of—
(iii)
a mere change in the form of conducting the trade or business so long as the property is retained in such trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in such trade or business,
(iv)
the acquisition of such property in an exchange described in section
1031,
1033, or
1038 to the extent that the basis of such property includes an amount representing the adjusted basis of other property owned by the taxpayer or a related person, or
(v)
the acquisition of such property by the taxpayer in a transaction described in section
332,
351,
361,
721, or
731 (or the acquisition of such property by the taxpayer from the transferee or acquiring corporation in a transaction described in such section), to the extent that the basis of the property in the hands of the taxpayer is determined by reference to its basis in the hands of the transferor or distributor.
(7)
Qualified restaurant property
(A)
In general
The term “qualified restaurant property” means any section
1250 property which is—
if more than 50 percent of the building’s square footage is devoted to preparation of, and seating for on-premises consumption of, prepared meals.
(8)
Qualified retail improvement property
(A)
In general
The term “qualified retail improvement property” means any improvement to an interior portion of a building which is nonresidential real property if—
(B)
Improvements made by owner
In the case of an improvement made by the owner of such improvement, such improvement shall be qualified retail improvement property (if at all) only so long as such improvement is held by such owner. Rules similar to the rules under paragraph (6)(B) shall apply for purposes of the preceding sentence.
(f)
Property to which section does not apply
This section shall not apply to—
(1)
Certain methods of depreciation
Any property if—
(B)
for the 1st taxable year for which a depreciation deduction would be allowable with respect to such property in the hands of the taxpayer, the property is properly depreciated under the unit-of-production method or any method of depreciation not expressed in a term of years (other than the retirement-replacement-betterment method or similar method).
(2)
Certain public utility property
Any public utility property (within the meaning of subsection (i)(10)) if the taxpayer does not use a normalization method of accounting.
(4)
Sound recordings
Any works which result from the fixation of a series of musical, spoken, or other sounds, regardless of the nature of the material (such as discs, tapes, or other phonorecordings) in which such sounds are embodied.
(5)
Certain property placed in service in churning transactions
(A)
In general
Property—
(B)
Subparagraph (A)(ii) not to apply
Clause (ii) of subparagraph (A) shall not apply to—
(C)
Special rule
In the case of any property to which this section would apply but for this paragraph, the depreciation deduction under section
167 shall be determined under the provisions of this section as in effect before the amendments made by section 201 of the Tax Reform Act of 1986.
(g)
Alternative depreciation system for certain property
(1)
In general
In the case of—
(2)
Alternative depreciation system
For purposes of paragraph (1), the alternative depreciation system is depreciation determined by using—
(C)
a recovery period determined under the following table:
| In the case of: | The recovery period shall be: |
|---|---|
| (i) Property not described in clause (ii) or (iii) | The class life. |
| (ii) Personal property with no class life | 12 years. |
| (iii) Nonresidential real and residential rental property | 40 years. |
| (iv) Any railroad grading or tunnel bore or water utility property | 50 years. |
(3)
Special rules for determining class life
(A)
Tax-exempt use property subject to lease
In the case of any tax-exempt use property subject to a lease, the recovery period used for purposes of paragraph (2) shall (notwithstanding any other subparagraph of this paragraph) in no event be less than 125 percent of the lease term.
(B)
Special rule for certain property assigned to classes
For purposes of paragraph (2), in the case of property described in any of the following subparagraphs of subsection (e)(3), the class life shall be determined as follows:
| If property is described in subparagraph: | The class life is: |
|---|---|
| (A)(iii) | 4 |
| (B)(ii) | 5 |
| (B)(iii) | 9.5 |
| (B)(vii) | 10 |
| (C)(i) | 10 |
| (C)(iii) | 22 |
| (C)(iv) | 14 |
| (D)(i) | 15 |
| (D)(ii) | 20 |
| (E)(i) | 24 |
| (E)(ii) | 24 |
| (E)(iii) | 20 |
| (E)(iv) | 39 |
| (E)(v) | 39 |
| (E)(vi) | 20 |
| (E)(vii) | 30 |
| (E)(viii) | 35 |
| (E)(ix) | 39 |
| (F) | 25 |
(C)
Qualified technological equipment
In the case of any qualified technological equipment, the recovery period used for purposes of paragraph (2) shall be 5 years.
(D)
Automobiles, etc.
In the case of any automobile or light general purpose truck, the recovery period used for purposes of paragraph (2) shall be 5 years.
(E)
Certain real property
In the case of any section
1245 property which is real property with no class life, the recovery period used for purposes of paragraph (2) shall be 40 years.
(4)
Exception for certain property used outside United States
Subparagraph (A) of paragraph (1) shall not apply to—
(A)
any aircraft which is registered by the Administrator of the Federal Aviation Agency and which is operated to and from the United States or is operated under contract with the United States;
(C)
any vessel documented under the laws of the United States which is operated in the foreign or domestic commerce of the United States;
(D)
any motor vehicle of a United States person (as defined in section
7701
(a)(30)) which is operated to and from the United States;
(E)
any container of a United States person which is used in the transportation of property to and from the United States;
(F)
any property (other than a vessel or an aircraft) of a United States person which is used for the purpose of exploring for, developing, removing, or transporting resources from the outer Continental Shelf (within the meaning of section 2 of the Outer Continental Shelf Lands Act, as amended and supplemented; (43 U.S.C. 1331));
(G)
any property which is owned by a domestic corporation (other than a corporation which has an election in effect under section
936) or by a United States citizen (other than a citizen entitled to the benefits of section
931 or
933) and which is used predominantly in a possession of the United States by such a corporation or such a citizen, or by a corporation created or organized in, or under the law of, a possession of the United States;
(H)
any communications satellite (as defined in section 103(3) of the Communications Satellite Act of 1962, 47 U.S.C. 702
(3)), or any interest therein, of a United States person;
(I)
any cable, or any interest therein, of a domestic corporation engaged in furnishing telephone service to which section
168
(i)(10)(C) applies (or of a wholly owned domestic subsidiary of such a corporation), if such cable is part of a submarine cable system which constitutes part of a communication link exclusively between the United States and one or more foreign countries;
(J)
any property (other than a vessel or an aircraft) of a United States person which is used in international or territorial waters within the northern portion of the Western Hemisphere for the purpose of exploring for, developing, removing, or transporting resources from ocean waters or deposits under such waters;
(K)
any property described in section
48
(l)(3)(A)(ix) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) which is owned by a United States person and which is used in international or territorial waters to generate energy for use in the United States; and
(L)
any satellite (not described in subparagraph (H)) or other spacecraft (or any interest therein) held by a United States person if such satellite or other spacecraft was launched from within the United States.
For purposes of subparagraph (J), the term “northern portion of the Western Hemisphere” means the area lying west of the 30th meridian west of Greenwich, east of the international dateline, and north of the Equator, but not including any foreign country which is a country of South America.
(5)
Tax-exempt bond financed property
For purposes of this subsection—
(6)
Imported property
(A)
Countries maintaining trade restrictions or engaging in discriminatory acts
If the President determines that a foreign country—
(i)
maintains nontariff trade restrictions, including variable import fees, which substantially burden United States commerce in a manner inconsistent with provisions of trade agreements, or
(ii)
engages in discriminatory or other acts (including tolerance of international cartels) or policies unjustifiably restricting United States commerce,
the President may by Executive order provide for the application of paragraph (1)(D) to any article or class of articles manufactured or produced in such foreign country for such period as may be provided by such Executive order. Any period specified in the preceding sentence shall not apply to any property ordered before (or the construction, reconstruction, or erection of which began before) the date of the Executive order unless the President determines an earlier date to be in the public interest and specifies such date in the Executive order.
(B)
Imported property
For purposes of this subsection, the term “imported property” means any property if—
(ii)
less than 50 percent of the basis of such property is attributable to value added within the United States.
For purposes of this subparagraph, the term “United States” includes the Commonwealth of Puerto Rico and the possessions of the United States.
(7)
Election to use alternative depreciation system
(A)
In general
If the taxpayer makes an election under this paragraph with respect to any class of property for any taxable year, the alternative depreciation system under this subsection shall apply to all property in such class placed in service during such taxable year. Notwithstanding the preceding sentence, in the case of nonresidential real property or residential rental property, such election may be made separately with respect to each property.
(h)
Tax-exempt use property
(1)
In general
For purposes of this section—
(A)
Property other than nonresidential real property
Except as otherwise provided in this subsection, the term “tax-exempt use property” means that portion of any tangible property (other than nonresidential real property) leased to a tax-exempt entity.
(B)
Nonresidential real property
(i)
In general
In the case of nonresidential real property, the term “tax-exempt use property” means that portion of the property leased to a tax-exempt entity in a disqualified lease.
(ii)
Disqualified lease
For purposes of this subparagraph, the term “disqualified lease” means any lease of the property to a tax-exempt entity, but only if—
(I)
part or all of the property was financed (directly or indirectly) by an obligation the interest on which is exempt from tax under section
103
(a) and such entity (or a related entity) participated in such financing,
(iii)
35-percent threshold test
Clause (i) shall apply to any property only if the portion of such property leased to tax-exempt entities in disqualified leases is more than 35 percent of the property.
(C)
Exception for short-term leases
(i)
In general
Property shall not be treated as tax-exempt use property merely by reason of a short-term lease.
(D)
Exception where property used in unrelated trade or business
The term “tax-exempt use property” shall not include any portion of a property if such portion is predominantly used by the tax-exempt entity (directly or through a partnership of which such entity is a partner) in an unrelated trade or business the income of which is subject to tax under section
511. For purposes of subparagraph (B)(iii), any portion of a property so used shall not be treated as leased to a tax-exempt entity in a disqualified lease.