There shall be allowed as a
depreciation deduction a reasonable allowance for the
exhaustion, wear and tear (including a reasonable allowance
for obsolescence) -
(1)
of property used in the trade or
business, or
(2)
of property held for the production of
income.
(b)
Cross reference
For determination of depreciation
deduction in case of property to which section 168 applies,
see section 168.
(c)
Basis for depreciation
The basis on which exhaustion, wear and
tear, and obsolescence are to be allowed in respect of any
property shall be the adjusted basis provided in section 1011,
for the purpose of determining the gain on the sale or other
disposition of such property.
(2)
Special rule for property
subject to
lease
If any property is acquired subject to
a lease -
(A)
no portion of the adjusted basis shall
be allocated to the leasehold interest, and
the entire adjusted basis shall be
taken into account in determining the depreciation deduction
(if any) with respect to the property subject to the
lease.
(d)
Life tenants and
beneficiaries of trusts and estates
In the case of property held by one
person for life with remainder to another person, the
deduction shall be computed as if the life tenant were the
absolute owner of the property and shall be allowed to the
life tenant. In the case of property held in trust, the
allowable deduction shall be apportioned between the income
beneficiaries and the trustee in accordance with the pertinent
provisions of the instrument creating the trust, or, in the
absence of such provisions, on the basis of the trust income
allocable to each. In the case of an estate, the allowable
deduction shall be apportioned between the estate and the
heirs, legatees, and devisees on the basis of the income of
the estate allocable to each.
(e)
Certain term interests
not depreciable
(1)
In general
No depreciation deduction shall be
allowed under this section (and no depreciation or
amortization deduction shall be allowed under any other
provision of this subtitle) to the taxpayer for any term
interest in property for any period during which the remainder
interest in such property is held (directly or indirectly) by
a related person.
(2)
Coordination with other
provisions
This subsection shall not apply to any
term interest to which section 273 applies.
(B)
Section 305(e)
This subsection shall not apply to the
holder of the dividend rights which were separated from any
stripped preferred stock to which section 305(e)(1) applies.
If, but for this subsection, a
depreciation or amortization deduction would be allowable to
the taxpayer with respect to any term interest in property -
(A)
the taxpayer's basis in such property
shall be reduced by any depreciation or amortization
deductions disallowed under this subsection, and
(B)
the basis of the remainder interest in
such property shall be increased by the amount of such
disallowed deductions (properly adjusted for any depreciation
deductions allowable under subsection (d) to the taxpayer).
(A)
Denial of increase in
basis of remainderman
No increase in the basis of the
remainder interest shall be made under paragraph (3)(B) for
any disallowed deductions attributable to periods during which
the term interest was held -
(i)
by an organization exempt from tax
under this subtitle, or
(ii)
by a nonresident alien individual or
foreign corporation but only if income from the term interest
is not effectively connected with the conduct of a trade or
business in the United States.
(B)
Coordination with
subsection (d)
If, but for this subsection, a
depreciation or amortization deduction would be allowable to
any person with respect to any term interest in property, the
principles of subsection (d) shall apply to such person with
respect to such term interest.
(5)
Definitions
For purposes of this subsection -
(A)
Term interest in property
The term ''term interest in property''
has the meaning given such term by section 1001(e)(2).
The term ''related person'' means any
person bearing a relationship to the taxpayer described in
subsection (b) or (e) of section 267.
The Secretary shall prescribe such
regulations as may be necessary to carry out the purposes of
this subsection, including regulations preventing avoidance of
this subsection through cross-ownership arrangements or
otherwise.
(f)
Treatment of certain
property excluded from section 197
If a depreciation deduction is
allowable under subsection (a) with respect to any computer
software, such deduction shall be computed by using the
straight line method and a useful life of 36 months.
For purposes of this section, the term
''computer software'' has the meaning given to such term by
section 197(e)(3)(B); except that such term shall not include
any such software which is an amortizable section 197
intangible.
(2)
Certain interests or
rights acquired separately
If a depreciation deduction is
allowable under subsection (a) with respect to any property
described in subparagraph (B), (C), or (D) of section
197(e)(4), such deduction shall be computed in accordance with
regulations prescribed by the Secretary.
(3)
Mortgage servicing rights
If a depreciation deduction is
allowable under subsection (a) with respect to any right
described in section 197(e)(7), such deduction shall be
computed by using the straight line method and a useful life
of 108 months.
(g)
Depreciation under income
forecast method
If the depreciation deduction allowable
under this section to any taxpayer with respect to any
property is determined under the income forecast method or any
similar method -
(A)
the income from the property to be
taken into account in determining the depreciation deduction
under such method shall be equal to the amount of income
earned in connection with the property before the close of the
10th taxable year following the taxable year in which the
property was placed in service,
(B)
the adjusted basis of the property
shall only include amounts with respect to which the
requirements of section 461(h) are satisfied,
(C)
the depreciation deduction under such
method for the 10th taxable year beginning after the taxable
year in which the property was placed in service shall be
equal to the adjusted basis of such property as of the
beginning of such 10th taxable year, and
(D)
such taxpayer shall pay (or be entitled
to receive) interest computed under the look-back method of
paragraph (2) for any recomputation year.
The interest computed under the
look-back method of this paragraph for any recomputation year
shall be determined by -
(A)
first determining the depreciation
deductions under this section with respect to such property
which would have been allowable for prior taxable years if the
determination of the amounts so allowable had been made on the
basis of the sum of the following (instead of the estimated
income from such property) -
(i)
the actual income earned in connection
with such property for periods before the close of the
recomputation year, and
(ii)
an estimate of the future income to be
earned in connection with such property for periods after the
recomputation year and before the close of the 10th taxable
year following the taxable year in which the property was
placed in service,
(B)
second, determining (solely for
purposes of computing such interest) the overpayment or
underpayment of tax for each such prior taxable year which
would result solely from the application of subparagraph (A),
and
(C)
then using the adjusted overpayment
rate (as defined in section 460(b)(7)), compounded daily, on
the overpayment or underpayment determined under subparagraph
(B).
For purposes of the preceding sentence,
any cost incurred after the property is placed in service
(which is not treated as a separate property under paragraph
(5)) shall be taken into account by discounting (using the
Federal mid-term rate determined under section 1274(d) as of
the time such cost is incurred) such cost to its value as of
the date the property is placed in service. The taxpayer may
elect with respect to any property to have the preceding
sentence not apply to such property.
(3)
Exception from look-back
method
Paragraph (1)(D) shall not apply with
respect to any property which had a cost basis of $100,000 or
less.
For purposes of this subsection, except
as provided in regulations, the term ''recomputation year''
means, with respect to any property, the 3d and the 10th
taxable years beginning after the taxable year in which the
property was placed in service, unless the actual income
earned in connection with the property for the period before
the close of such 3d or 10th taxable year is within 10 percent
of the income earned in connection with the property for such
period which was taken into account under paragraph (1)(A).
(A)
Certain costs treated as
separate property
For purposes of this subsection, the
following costs shall be treated as separate properties:
(i)
Any costs incurred with respect to any
property after the 10th taxable year beginning after the
taxable year in which the property was placed in service.
(ii)
Any costs incurred after the property
is placed in service and before the close of such 10th taxable
year if such costs are significant and give rise to a
significant increase in the income from the property which was
not included in the estimated income from the property.
(B)
Syndication income from
television series
In the case of property which is 1 or
more episodes in a television series, income from syndicating
such series shall not be required to be taken into account
under this subsection before the earlier of -
(i)
the 4th taxable year beginning after
the date the first episode in such series is placed in
service, or
(ii)
the earliest taxable year in which the
taxpayer has an arrangement relating to the future syndication
of such series.
(C)
Special rules for
financial exploitation of characters, etc.
For purposes of this subsection, in the
case of television and motion picture films, the income from
the property shall include income from the exploitation of
characters, designs, scripts, scores, and other incidental
income associated with such films, but only to the extent that
such income is earned in connection with the ultimate use of
such items by, or the ultimate sale of merchandise to, persons
who are not related persons (within the meaning of section
267(b)) to the taxpayer.
(D)
Collection of interest
For purposes of subtitle F (other than
sections 6654 and 6655), any interest required to be paid by
the taxpayer under paragraph (1) for any recomputation year
shall be treated as an increase in the tax imposed by this
chapter for such year.
For purposes of paragraph (2),
determinations of the amount of income earned in connection
with any property shall be made in the same manner as for
purposes of applying the income forecast method; except that
any income from the disposition of such property shall be
taken into account.
(F)
Treatment of pass-thru
entities
Rules similar to the rules of section
460(b)(4) shall apply for purposes of this subsection.
(6)
Limitation on property
for which income forecast method may be used
The depreciation deduction allowable
under this section may be determined under the income forecast
method or any similar method only with respect to -
(A)
property described in paragraph (3) or
(4) of section 168(f),
(E)
other property specified in
regulations.
Such methods may not be used with
respect to any amortizable section 197 intangible (as defined
in section 197(c)).
(1)
For additional rule applicable to
depreciation of improvements in the case of mines, oil and gas
wells, other natural deposits, and timber, see section 611.
(2)
For amortization of goodwill and
certain other intangibles, see section 197
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