26 U.S.C. § 168 — Accelerated cost recovery system

(a) General rule This section explains how to figure the depreciation deduction allowed by section 167(a) for tangible property. Unless another part of this section says otherwise, you find that deduction using three things: (1) the applicable depreciation method, (2) the applicable recovery period, and (3) the applicable convention. The rest of this section defines each of those three things. (b) Applicable depreciation method (1) In general. Most of the time, the depreciation method is the 200 percent declining balance method. But you switch to the straight line method in the first year that switching gives a bigger deduction, based on the property's adjusted basis at the start of that year. (2) 150 percent declining balance method in certain cases. For some property, use 150 percent declining balance instead of 200 percent. This applies to: (A) 15-year or 20-year property not covered by paragraph (3) below; (B) qualified smart electric meters or qualified smart electric grid systems; or (C) any other property where the taxpayer elects this treatment under paragraph (5). (3) Property to which the straight line method applies. For the following property, you must always use the straight line method: (A) nonresidential real property; (B) residential rental property; (C) any railroad grading or tunnel bore; (D) property the taxpayer elects under paragraph (5) to treat this way; (E) property described in subsection (e)(3)(D)(ii) — certain natural gas gathering lines; (F) water utility property described in subsection (e)(5); and (G) qualified improvement property described in subsection (e)(6). (4) Salvage value treated as zero. When figuring depreciation, treat the property's salvage value as zero — don't subtract anything for what it might be worth at the end of its useful life. (5) Election. A taxpayer can choose paragraph (2) or (3)(D) treatment for one or more classes of property in a given tax year. Once made, the election applies to all property in that class placed in service that year, and it cannot be undone. (c) Applicable recovery period This subsection gives the number of years — the "recovery period" — used to depreciate each type of property: - 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 - Railroad grading or tunnel bore: 50 years (d) Applicable convention (1) In general. Unless one of the rules below applies, use the half-year convention. (2) Real property. For nonresidential real property, residential rental property, and railroad grading or tunnel bore, use the mid-month convention instead. (3) Special rule where substantial property is placed in service during the last 3 months of the taxable year. (A) In general. Compare two numbers for the year: the total basis of section 168 property placed in service in the last three months of the tax year, and 40 percent of the total basis of all section 168 property placed in service that year. If the first number is bigger, then all section 168 property placed in service that year must use the mid-quarter convention instead of the half-year convention. (B) Certain property not taken into account. When making that comparison, don't count nonresidential real property, residential rental property, railroad grading or tunnel bore, or any property both placed in service and disposed of in the same year. (4) Definitions. (A) The half-year convention treats all property placed in service (or disposed of) during a tax year as if that happened exactly at the midpoint of the year. (B) The mid-month convention treats all property placed in service (or disposed of) during a month as if that happened at the midpoint of the month. (C) The mid-quarter convention treats all property placed in service (or disposed of) during a quarter of the tax year as if that happened at the midpoint of the quarter. (e) Classification of property (1) In general. Unless stated otherwise, a property's class depends on its "class life" — a set number of years assigned to that type of asset: - Class life of 4 years or less → 3-year property - More than 4 but less than 10 → 5-year property - 10 or more but less than 16 → 7-year property - 16 or more but less than 20 → 10-year property - 20 or more but less than 25 → 15-year property - 25 or more → 20-year property (2) Residential rental or nonresidential real property. (A) "Residential rental property" is a building where 80 percent or more of the gross rental income for the year comes from dwelling units — houses or apartments people live in. It does not include a hotel, motel, or similar place where more than half the units are rented to short-term (transient) guests. If the taxpayer occupies part of the building, the rental value of that part still counts as rental income for this 80-percent test. (B) "Nonresidential real property" is section 1250 property that is not residential rental property and does not have a class life under 27.5 years. (3) Classification of certain property. This paragraph lists specific items that count as each class no matter their class life. (A) 3-year property includes certain race horses (with age and placed-in-service date rules), horses other than race horses that are over 12 years old when placed in service, and qualified rent-to-own property. (B) 5-year property includes automobiles and light general-purpose trucks; semiconductor manufacturing equipment; computer-based telephone central-office switching equipment; qualified technological equipment; section 1245 property used in research and experimentation; certain older energy-property described by cross-reference to a repealed credit provision; machinery or equipment (other than grain bins, cotton ginning equipment, fences, or other land improvements) used in a farming business if first used by the taxpayer after 2017; and certain qualified clean-energy facilities, property, and energy storage technology. (C) 7-year property includes railroad track; motorsports entertainment complexes; the Alaska natural gas pipeline; natural gas gathering lines first used by the taxpayer after April 11, 2005; and any property with no class life that isn't classified elsewhere. (D) 10-year property includes single purpose agricultural or horticultural structures; trees or vines that bear fruit or nuts; qualified smart electric meters; and qualified smart electric grid systems. (E) 15-year property includes municipal wastewater treatment plants; telephone distribution equipment used for two-way voice and data communication; retail motor fuel outlets; initial clearing and grading of gas utility land; certain high-voltage (69 kilovolts or more) electric transmission equipment first used after April 11, 2005; natural gas distribution lines first used after April 11, 2005 and placed in service before 2011; and qualified improvement property. (F) 20-year property means initial clearing and grading of land for an electric utility's transmission and distribution plant. (4) Railroad grading or tunnel bore. This means all the earthwork and construction needed to build, rebuild, alter, protect, improve, replace, or restore a railroad roadbed or right-of-way — excavating, tunneling, building embankments, clearing land, moving roads or streams out of the way, sodding slopes, and similar work. (5) Water utility property. Property that is a core part of gathering, treating, or selling water and that, but for this rule, would be 20-year property, plus any municipal sewer. (6) Qualified improvement property. (A) In general. An improvement the taxpayer makes to the inside of a nonresidential building, made after the building was first placed in service. (B) Certain improvements not included. This does not include work that enlarges the building, adds an elevator or escalator, or changes the building's internal structural framework. (f) Property to which this section does not apply This section's rules don't apply to: (1) Property the taxpayer elects to exclude, if for its first depreciable year the property is properly depreciated under the unit-of-production method or another method not expressed as a set number of years (other than the retirement-replacement-betterment method or something similar). (2) Public utility property (defined in subsection (i)(10)) if the taxpayer doesn't use a "normalization method of accounting" for it — see subsection (i)(9) for what that means. (3) Motion picture film or video tape. (4) Sound recordings — recorded music or spoken sounds, no matter what physical medium holds them (discs, tapes, or otherwise). (5) Certain property involved in "churning" transactions — anti-abuse rules aimed at property shuffled between related parties around the 1986 tax reform to try to keep more favorable pre-1986 depreciation. (A) It covers property described under the pre-1986 version of this section's paragraph (4), including a version of that rule with the years shifted from 1980/1981 to 1986/1987. (B) That shifted-year rule doesn't apply to residential rental or nonresidential real property; to property where the pre-enactment deduction for its first year would actually be bigger than what this section (using the half-year convention) would allow; or to property this section (as amended in 1986) already applied to in the hands of whoever transferred it. (C) Where this paragraph does apply, the section 167 depreciation deduction is instead figured under the rules that existed before the 1986 Tax Reform Act changes. (g) Alternative depreciation system for certain property (1) In general. Some property must use the "alternative depreciation system" (ADS) instead of the normal rules: (A) tangible property used predominantly outside the United States during the year; (B) tax-exempt use property; (C) tax-exempt bond financed property; (D) imported property covered by a presidential order under paragraph (6); (E) property for which the taxpayer elects ADS under paragraph (7); (F) property described in paragraph (8) — property held by an electing real property trade or business; and (G) property with a recovery period of 10 years or more held by an electing farming business. (2) Alternative depreciation system. Under ADS you use: (A) the straight line method, ignoring salvage value; (B) the normal applicable convention from subsection (d); and (C) this recovery-period table — property not covered below uses its class life; personal property with no class life uses 12 years; residential rental property uses 30 years; nonresidential real property uses 40 years; and railroad grading, tunnel bore, or water utility property uses 50 years. (3) Special rules for determining class life. (A) For tax-exempt use property that is leased, the recovery period can never be less than 125 percent of the lease term. (B) For several categories of 15-year property listed in subsection (e)(3), the law assigns specific class-life numbers to use instead — ranging from 4 years up to 35 years, each tied to a specific listed category. (C) Qualified technological equipment uses a 5-year recovery period. (D) Automobiles and light general-purpose trucks use a 5-year recovery period. (E) Section 1245 real property with no class life uses a 40-year recovery period. (4) Exception for certain property used outside the United States. The "used mostly outside the U.S." trigger in paragraph (1)(A) does not apply to a long list of property with strong U.S. ties, including: U.S.-registered aircraft flown to and from the U.S. or operated under U.S. government contract; rolling stock of a U.S. rail carrier or U.S. person, as long as it isn't leased to foreign persons for more than 12 months total in any 24-month stretch; U.S.-documented vessels used in U.S. commerce; motor vehicles of U.S. persons that travel to and from the U.S.; shipping containers of U.S. persons used to move goods to and from the U.S.; property (other than vessels or aircraft) used by U.S. persons to explore, develop, or transport resources from the Outer Continental Shelf; property owned by a U.S. corporation or citizen and used mainly in a U.S. possession; communications satellites (or interests in them) owned by U.S. persons; certain submarine telephone cables of a qualifying domestic telephone company linking only the U.S. and foreign countries; property used by U.S. persons in certain northern-hemisphere international waters to develop ocean resources; certain U.S.-owned property generating energy in those waters; and satellites or spacecraft (other than the communications-satellite category) launched from the United States and held by U.S. persons. For the ocean-waters rule, "northern portion of the Western Hemisphere" means the area west of the 30th meridian west of Greenwich, east of the international dateline, and north of the Equator, but excluding any South American country. (5) Tax-exempt bond financed property. (A) In general, this means property financed, directly or indirectly, by a bond whose interest is tax-exempt under section 103(a). (B) When a bond's proceeds finance more than one piece of property, the proceeds are treated as financing the property in the order each piece is placed in service. (C) This does not include a qualified residential rental project under section 142(a)(7). (6) Imported property. (A) If the President finds that a foreign country keeps unfair nontariff trade barriers or discriminates against U.S. commerce, the President may issue an executive order applying paragraph (1)(D) to goods from that country for a set period. That period generally does not reach back to property ordered — or whose construction, reconstruction, or erection began — before the executive order, unless the President specifically sets an earlier date. (B) "Imported property" means property that either was completed outside the United States, or has less than 50 percent of its value added within the United States; for this test, "United States" includes Puerto Rico and U.S. possessions. (7) Election to use the alternative depreciation system. (A) A taxpayer can elect ADS for a whole class of property placed in service in a year — except for nonresidential real property or residential rental property, where the election can be made building by building. (B) Once made, this election cannot be undone. (8) Electing real property trade or business. Nonresidential real property, residential rental property, and qualified improvement property held by an electing real property trade or business (defined in section 163(j)(7)(B)) fall into this ADS category. (h) Tax-exempt use property (1) In general. (A) For property other than nonresidential real property, "tax-exempt use property" is the portion of the property leased to a tax-exempt entity. (B) For nonresidential real property, it means only the portion leased to a tax-exempt entity under a "disqualified lease" — a lease with any of these features: (I) the property was financed with tax-exempt bonds and the tax-exempt entity (or someone related to it) helped arrange that financing; (II) the lease includes, or amounts to, a fixed-price option to buy or sell involving the tax-exempt entity; (III) the lease runs longer than 20 years; or (IV) the lease happens after the tax-exempt entity sold, transferred, or leased out the property, having used it beforehand. This "disqualified lease" rule only applies if more than 35 percent of the property is leased to tax-exempt entities this way. Improvements to the property (other than land) aren't treated as separate property for this test. A sale-leaseback within the first three months the tax-exempt entity uses the property doesn't trigger feature (IV). (C) A short-term lease doesn't by itself make property tax-exempt use property. A "short-term lease" runs less than 3 years and less than the greater of 1 year or 30 percent of the property's class life — except that 30-percent test doesn't apply to nonresidential real property or property with no class life. (D) Property isn't tax-exempt use property if it's mainly used by the tax-exempt entity in an unrelated trade or business whose income is taxed under section 511. (E) For this paragraph, "nonresidential real property" also includes residential rental property. (2) Tax-exempt entity. (A) This means: the United States, any state or its subdivisions, any U.S. possession, or any of their agencies; organizations (other than certain cooperatives) exempt from federal income tax; any foreign person or entity; and Indian tribal governments, treated like a state. (B) The foreign-person-or-entity category doesn't apply if more than half of the foreign person's income from using the property is taxed by the U.S. or included in a U.S. shareholder's income under section 951 — exclusions and exemptions are ignored when checking this 50 percent threshold, but do apply when figuring what's actually taxed. (C) "Foreign person or entity" means foreign governments, international organizations, their agencies, and any non-U.S. person, but not a foreign partnership or similar pass-through entity. (D) A corporation isn't treated as a government instrumentality if all its activities are taxed and the government doesn't select a majority of its board. (E) An organization that was tax-exempt at any point in the 5 years before it first used the property is still treated as tax-exempt for that property (this doesn't apply to the Federal Home Loan Mortgage Corporation). A formerly section 501(c)(12)-exempt organization can elect out of this rule by giving up its tax exemption for the "tax-exempt use period" — running from first use of the property through 15 years after the end of the property's applicable recovery period; this election can't be undone. A successor organization inherits its predecessor's treatment. "First used" means when the property is first placed in service under a lease to the organization, or, for property held through a partnership, the later of when the partnership first uses it or when the organization joins the partnership. (3) Special rules for certain high technology equipment. (A) Qualified technological equipment isn't tax-exempt use property if it's leased to a tax-exempt entity for 5 years or less — renewal options at fair market value don't count toward that limit, except that no more than 24 months of such renewals can be ignored this way. (B) But this 5-year exception doesn't apply if the property was financed with tax-exempt bonds tied to the entity; the lease follows a sale or lease-back from an entity that used the property before that sale or lease (unless within 3 months of the entity's first use); or the tax-exempt entity is the United States or a federal agency. (4) Related entities. Two governmental units (or their agencies) are related if they draw their power from the same sovereign, with the U.S., each state, and each U.S. possession each counted as a separate sovereign. Other entities are related if they share significant common purposes and membership, or common direction or control; if one owns 50 percent or more of the other; or if a transaction is structured specifically to avoid these tax-exempt-use rules. Entities already related under the common-sovereign or common-purpose rules count as one entity for the 50-percent ownership test. (5) Tax-exempt use of property leased to partnerships, etc., determined at the partner level. When property is leased to a partnership, whether it's tax-exempt use property is figured by treating each tax-exempt partner's share of the property (figured under paragraph (6)(C)) as leased separately to that partner. Similar rules apply to other pass-through and tiered entities. Unless proven otherwise to the IRS, the partners of a foreign partnership are presumed to be non-U.S. persons. (6) Treatment of property owned by partnerships, etc. (A) If a partnership with both tax-exempt and taxable partners owns property that wouldn't otherwise be tax-exempt use property, and the tax-exempt partner's allocation isn't a "qualified allocation," that partner's proportionate share of the property is treated as tax-exempt use property. (B) A "qualified allocation" gives the tax-exempt partner the same fixed share of every item of income, gain, loss, deduction, credit, and basis for as long as it's a partner, and that allocation must have real economic effect under section 704(b)(2); allocations under section 704(c) don't count for this test. (C) The tax-exempt partner's proportionate share is based on whichever is larger: its share of partnership income or its share of gain (not counting section 704(c) gain) — if that share can vary, use the highest share the partner could ever receive. (D) Whether the property is used in an unrelated trade or business is figured without regard to section 514. (E) Similar rules apply to other pass-through and tiered entities. (F) A corporation 50 percent or more owned (by value) by tax-exempt entities — a "tax-exempt controlled entity" — is itself treated as tax-exempt, unless it elects otherwise. If it elects out, it's no longer treated as tax-exempt for these rules, but any gain a tax-exempt owner later gets from selling its interest (and any dividends or interest it receives from the entity, out of untaxed income) counts as taxable unrelated business income; this election is irrevocable and binds every tax-exempt owner. For publicly traded stock, only tax-exempt holders owning at least 5 percent count toward the 50-percent test, with related entities combined; stock held indirectly counts too, under section 318's attribution rules (ignoring its 50-percent ownership limitation). Treasury regulations must address partnership guaranteed payments and may allow excluding or separating certain items when figuring qualified allocations. (7) Lease. For this subsection, "lease" includes any grant of a right to use property. (8) Regulations. The Treasury Secretary must issue regulations needed to carry out this subsection. (i) Definitions and special rules (1) Class life. Except as this section otherwise provides, "class life" means the class life that would have applied to the property as of January 1, 1986, under the old rules in section 167(m) as in effect before the Revenue Reconciliation Act of 1990, as if the taxpayer had elected into that system. Treasury has an office that tracks and studies actual experience with depreciable assets. (2) Qualified technological equipment. (A) This means computers or peripheral equipment, high-tech telephone station equipment installed at a customer's premises, and high-tech medical equipment. (B) A "computer" is a programmable, electronically activated device that can accept information, apply set processes to it, and produce results (with or without human help), built around a central processing unit with real storage, logic, arithmetic, and control capabilities; "related peripheral equipment" is auxiliary machinery designed to be controlled by that central processing unit. This category excludes equipment that's just an integral part of some other, non-computer property; office machines like typewriters, calculators, adding and accounting machines, copiers, and duplicating equipment; and equipment mainly used for amusement or entertainment. (C) "High technology medical equipment" means electronic, electromechanical, or computer-based equipment used to screen, monitor, observe, diagnose, or treat patients in a lab, medical, or hospital setting. (3) Lease term. (A) To figure a lease's term: count renewal options; count the time covered by a related service contract or arrangement for the same or substantially similar property that's part of the same deal; and treat two or more back-to-back leases that are part of the same deal, covering the same or substantially similar property, as one lease. (B) For nonresidential real property or residential rental property, don't count a renewal option set at fair market value determined when it's renewed. (4) General asset accounts. Under Treasury regulations, a taxpayer may keep one or more general asset accounts for section 168 property. Except as regulations provide, all proceeds from disposing of property in such an account are treated as ordinary income. (5) Changes in use. Treasury must issue regulations on how to figure the section 167(a) deduction for property that changes its status under this section for a year (and later years) while the same person keeps holding it. (6) Treatment of additions or improvements to property. For an addition to, or improvement of, property: (A) the deduction for the addition or improvement is figured the same way it would be if that addition or improvement had been placed in service at the same time as the underlying property; but (B) the addition or improvement's own recovery period starts on the later of the date it's placed in service, or the date the underlying property was placed in service. (7) Treatment of certain transferees. (A) When property is transferred in a transaction covered by subparagraph (B), the transferee is treated as the transferor for figuring depreciation under this section, but only up to the transferor's adjusted basis in the property. If the pre-1986-Tax-Reform-Act version of this section applied to the transferor, that older version applies to the transferee too. (B) The covered transactions are contributions or exchanges under sections 332, 351, 361, 721, or 731, and transfers between members of the same affiliated group filing a consolidated return. (C) Under regulations, property disposed of and then reacquired by the same taxpayer is treated, for depreciation purposes, as if it had never been disposed of. (8) Treatment of leasehold improvements. (A) A building built, or improvements made, on leased property is depreciated under this section's normal rules if it is property this section covers. (B) If a landlord (lessor) builds an improvement for a tenant (lessee), and permanently gives it up or abandons it when the lease ends, that is treated as the landlord disposing of it at that time, for figuring gain or loss. (C) See section 110(b) for how landlord-funded, tenant-requested construction paid for with cash or a rent reduction is treated. (9) Normalization rules. (A) To use accelerated depreciation on public utility property under subsection (f)(2), the taxpayer must: use the same depreciation method, and a depreciation period at least as long, when computing the tax expense used to set customer rates and to report results in its regulated books, as it uses under this section; and if the deduction actually allowed under this section for that property differs from what section 167 would allow using that regulated-books method, the taxpayer must adjust a reserve account to reflect the resulting deferred taxes. (B) Using an inconsistent estimate or projection for ratemaking — for example, projecting tax expense, depreciation expense, or the deferred-tax reserve without using that same projection consistently for all three plus the rate base — breaks these requirements; Treasury may identify other inconsistent practices by regulation. (C) If public utility property doesn't meet these normalization rules, its section 167(a) depreciation allowance is figured using the method and period used for the regulated books instead of this section's usual rules. (10) Public utility property. Property used predominantly in the business of furnishing or selling: electricity, water, or sewage disposal; gas or steam through a local distribution system; telephone service, or other communication services sold by the Communications Satellite Corporation as authorized under the Communications Satellite Act of 1962; or gas or steam transported by pipeline — but only if the rates charged are set or approved by a state or local government, a federal agency, or a public service or utility commission. (11) Research and experimentation. This has the same meaning as "research and experimental" in section 174. (12) Section 1245 and 1250 property. These terms mean what sections 1245(a)(3) and 1250(c) say they mean. (13) Single purpose agricultural or horticultural structure. (A) This covers single purpose livestock structures and single purpose horticultural structures. (B) A "single purpose livestock structure" is a building specifically designed, built, and used to house, raise, and feed one particular type of livestock (poultry counts as livestock) and its offspring, plus the equipment needed for that. A "single purpose horticultural structure" is a greenhouse built and used commercially to grow plants, or a structure built and used commercially to grow mushrooms. (C) A structure that includes work space still counts, but only if that space is used solely for tending the livestock or plants, maintaining the structure itself, or maintaining or replacing the equipment or stock inside it. (14) Qualified rent-to-own property. (A) Property a rent-to-own dealer holds to put under a rent-to-own contract. (B) A "rent-to-own dealer" regularly enters rent-to-own contracts for consumer property in the ordinary course of business, where a substantial share of those deals end early with the property returned before the customer finishes paying for it. (C) "Consumer property" is tangible personal property normally used at home for personal use. (D) A "rent-to-own contract" is a lease of consumer property to an individual that: (i) is titled something like "Rent-to-Own Agreement" or similar; (ii) has level (or step-down, never below 40 percent of the largest payment) regular weekly or monthly payments; (iii) keeps legal title with the dealer until all the payments (or required early-purchase payments) are made; (iv) runs for a set maximum period of no more than 156 weeks or 36 months, counting renewals; (v) generally requires total payments over that period that exceed the item's normal retail price plus interest; (vi) caps total payments at $10,000 per item; (vii) lets the customer walk away at the end of any payment period by returning the item in good working order, with no further obligation and no refund of past payments; and (viii) bars the customer from selling, subletting, mortgaging, pawning, pledging, or otherwise disposing of the item until all payments are made. (15) Motorsports entertainment complex. (A) A permanent racing-track facility that, within 36 months of being placed in service, hosts at least one public racing event for automobiles, trucks, or motorcycles. (B) If owned by the same taxpayer and provided for the complex's patrons, this also includes supporting facilities like parking lots, sidewalks, waterways, bridges, fences, and landscaping; food, beverage, and souvenir stands; and related items like ticket booths, the track surface, suites, grandstands, viewing structures, and similar special-purpose structures. (C) It does not include transportation equipment, administrative-service assets, warehouses, administrative buildings, hotels, or motels. (D) This category doesn't apply to property placed in service after December 31, 2025. (16) Alaska natural gas pipeline. The natural gas pipeline system in Alaska with a capacity over 500 billion Btu of gas per day, placed in service after December 31, 2013 (or treated as placed in service on January 1, 2014, if the taxpayer elects that). It includes the pipe, trunk lines, related equipment, and appurtenances, but not any gas processing plant. (17) Natural gas gathering line. Pipe, equipment, and appurtenances that the Federal Energy Regulatory Commission classifies as a gathering line, or that carry gas from the wellhead (or a common point) to where it first reaches a gas processing plant, a certified interstate transmission pipeline, an intrastate transmission pipeline, or a direct connection to a local gas company, storage facility, or industrial customer. (18) Qualified smart electric meters. (A) A smart electric meter placed in service by a supplier or provider of electric energy, with a class life of at least 16 years (figured without regard to subsection (e)). (B) A "smart electric meter" is a time-based meter and related communication equipment that can measure and record usage on at least 24 separate time segments a day; exchange information with the customer to support time-based rates or demand response; feed usage data to the supplier so it can inform customers electronically; and provide net metering. (19) Qualified smart electric grid systems. (A) Smart grid property used as part of a system for electric distribution grid communication, monitoring, and management, placed in service by an electricity supplier or provider, with a class life of at least 16 years (figured without regard to subsection (e)). (B) "Smart grid property" is electronics and related equipment able to sense, collect, and monitor data from all parts of the grid; provide real-time, two-way communication to monitor or manage it; and analyze that data in real time to predict events and improve the grid's reliability, quality, and performance. (j) Property on Indian reservations (1) In general. For "qualified Indian reservation property," use the shorter recovery periods in paragraph (2) instead of the normal table in subsection (c). (2) Applicable recovery period for Indian reservation property. - 3-year property: 2 years - 5-year property: 3 years - 7-year property: 4 years - 10-year property: 6 years - 15-year property: 9 years - 20-year property: 12 years - Nonresidential real property: 22 years (3) Deduction allowed in computing minimum tax. When figuring alternative minimum taxable income under section 55, this deduction is figured under this section without the usual section 56 adjustment. (4) Qualified Indian reservation property defined. (A) Property from the paragraph (2) table that is: used by the taxpayer mainly in actively conducting a trade or business on an Indian reservation; not regularly used or located outside the reservation; not bought, directly or indirectly, from someone related to the taxpayer (as defined in section 465(b)(3)(C)); and not used for class I, II, or III gaming under the Indian Gaming Regulatory Act. (B) This excludes any property that must use the alternative depreciation system under subsection (g), figured without regard to the (g)(7) election and after applying section 280F(b)'s limits for listed property with limited business use. (C) The "not used off the reservation" test doesn't block qualified infrastructure property located just outside the reservation if its purpose is to connect to infrastructure property located inside it — meaning tribal infrastructure that's available to the public and placed in service as part of the taxpayer's on-reservation business, such as roads, power lines, water systems, railroad spurs, and communications facilities. (5) Real estate rentals. Renting out real property located on a reservation counts as actively conducting a trade or business on that reservation. (6) Indian reservation defined. This means a reservation as defined in the Indian Financing Act of 1974 or the Indian Child Welfare Act of 1978, with a special rule treating "former Indian reservations in Oklahoma" as covering only land within an Oklahoma tribe's jurisdiction that the Secretary of the Interior recognizes as eligible for trust-land status. (7) Coordination with nonrevenue laws. Any reference in this subsection to a law outside the tax code is treated as frozen as of the date this paragraph was enacted. (8) Election out. A taxpayer can elect, by class of property and year, to opt out of paragraph (1)'s shorter recovery periods for that class. This election cannot be undone. (9) Termination. This subsection does not apply to property placed in service after December 31, 2021. (k) Special allowance for certain property (1) Additional allowance. For "qualified property," the depreciation deduction for the year it is placed in service includes an extra allowance equal to 100 percent of its adjusted basis. The property's basis is then reduced by that amount before figuring any regular depreciation deduction for that year or later years. (2) Qualified property. (A) In general, this includes — if its original use starts with the taxpayer, or it is acquired used and meets the requirements in (E)(i) — property under this section with a recovery period of 20 years or less; computer software depreciable under section 167(f)(1)(B); water utility property; and certain qualified film, television, live theatrical, or sound recording productions that would otherwise be deductible under section 181. (B) Certain property with longer production periods also qualifies if it meets the (A) requirements, has a recovery period of at least 10 years or is transportation property (tangible personal property used in a trade or business of transporting people or property), is subject to the uniform capitalization rules of section 263A, and meets a specific long-production-period test under section 263A(f)(1)(B)(iii) — except this doesn't apply to the aircraft described in (C). (C) Certain aircraft also qualify if they meet the (A)(ii) requirement, are not transportation property as just defined (except for agricultural or firefighting aircraft), were purchased with a nonrefundable deposit of the lesser of 10 percent of the cost or $100,000, and have an estimated production period over 4 months and a cost over $200,000. (D) Property that must use the alternative depreciation system under subsection (g) doesn't qualify, figured without regard to the (g)(7) election and after applying section 280F(b)'s listed-property limits. (E) Special rules: property meets the "original use" requirement if it wasn't used by the taxpayer before this acquisition and the acquisition meets certain related-party and cost-basis tests borrowed from section 179(d); and a sale-leaseback within three months of a lessor's first use of the property — or, for multiple units under one lease, within three months of the last unit's placed-in-service date, as long as that spread is no more than 12 months — is treated as if the property were first placed in service on the date of that later sale, as long as the same user keeps using it. (F) Coordination with section 280F: for passenger automobiles that are qualified property, the annual depreciation cap under section 280F(a)(1)(A)(i) goes up by $8,000 — a smaller add-on of $6,400 or $4,800 applies to certain vehicles bought before September 28, 2017 and placed in service in 2018 or 2019 respectively — and this extra deduction counts when figuring any listed-property recapture under section 280F(b)(2). (G) This deduction is allowed for alternative minimum tax purposes without the usual section 56 adjustment. (H) Film, television, live theatrical, and sound recording productions are treated as placed in service when first released, broadcast, or performed live, as applicable. (3) and (4) [Both paragraphs have been repealed by later law.] (5) Special rules for certain plants bearing fruits and nuts. (A) For a "specified plant" that the taxpayer plants or grafts in the ordinary course of a farming business, and elects to cover under this paragraph, a 100-percent depreciation deduction is allowed for the year it's planted or grafted, and its basis is reduced by that amount. (B) A "specified plant" is any tree or vine that bears fruit or nuts, or any other plant that will yield more than one crop and normally takes over 2 years from planting to its first marketable crop — but not if planted or grafted outside the United States. (C) This election can only be revoked with IRS consent. (D) A plant covered by this paragraph can't also be treated as (k)(1) qualified property for the year it's placed in service — no double benefit. (E) This deduction is allowed for alternative minimum tax purposes, the same way as paragraph (2)(G). (6) [Repealed.] (7) Election out. A taxpayer can elect, by class of property and year, to skip paragraphs (1) and (2)(F) for that class. This election can only be revoked with IRS consent. (8) [Repealed.] (9) Exception for certain property. Qualified property does not include property mainly used in certain motor-vehicle-dealership-related trades or businesses that elected out of the business-interest-expense limits under section 163(j)(7)(A)(iv), or property used in a business that had floor plan financing debt if the related interest was already counted under section 163(j)(1)(C). (10) Special rule for property placed in service during certain periods. (A) For qualified property placed in service in the taxpayer's first tax year ending after January 19, 2025, if the taxpayer elects this treatment: substitute "40 percent" for "100 percent" in paragraph (1)(A) for most property, or "60 percent" for property described in (2)(B) or (2)(C) — the longer-production-period property and certain aircraft. (B) The same swap — "40 percent" for "100 percent" — applies to specified plants under paragraph (5) planted or grafted in that same first tax year, if elected. (C) Treasury sets the time, form, and manner for making this election. (l) Special allowance for second generation biofuel plant property (1) Additional allowance. For "qualified second generation biofuel plant property," the deduction for the year placed in service includes an extra 50 percent of its adjusted basis, and the basis is reduced by that amount before figuring regular depreciation. (2) Qualified second generation biofuel plant property. This is depreciable property that: is used entirely in the United States to make "second generation biofuel" as defined in section 40(b)(6)(E); has its original use begin with the taxpayer after this subsection was enacted; was bought by the taxpayer, as "purchase" is defined in section 179(d), after enactment, with no binding purchase contract already in place before enactment; and is placed in service before January 1, 2021. (3) Exceptions. This category excludes: property already covered by the (k) bonus-depreciation rules; property described in subsection (k)(2)(D) — property required to use the alternative depreciation system; property any portion of which is financed with tax-exempt bonds under section 103; and, if the taxpayer elects out by class and year, any property in that elected-out class. (4) Special rules. Rules similar to the acquisition and sale-leaseback rules in subsection (k)(2)(E) apply here too. (5) Allowance against alternative minimum tax. This deduction is allowed for AMT purposes, similar to subsection (k)(2)(G). (6) Recapture. If property stops being qualified second generation biofuel plant property, rules similar to the recapture rules in section 179(d)(10) apply. (7) Denial of double benefit. This deduction doesn't apply to property for which the taxpayer elected to expense costs under section 179C, which relates to certain refineries. (m) Special allowance for certain reuse and recycling property (1) In general. For "qualified reuse and recycling property," the deduction for the year placed in service includes an extra 50 percent of its adjusted basis, with the basis reduced by that amount before figuring regular depreciation. (2) Qualified reuse and recycling property. (A) This is reuse and recycling property that: is covered by this section; has a useful life of at least 5 years; has its original use begin with the taxpayer after August 31, 2008; and was either bought — as "purchase" is defined in section 179(d)(2) — after August 31, 2008 with no binding contract in place before that date, or acquired under a binding contract entered into after that date. (B) Exceptions: property already covered by the (k) bonus-depreciation rules (ignoring (k)'s paragraph (4)) doesn't count; property required to use the alternative depreciation system under (g) doesn't count, ignoring the (g)(7) election; and a taxpayer can elect, by class and year, out of this subsection entirely. (C) For property the taxpayer builds or produces for its own use, the "original use after August 31, 2008" test is met if the taxpayer started building it after that date. (D) This deduction is allowed for alternative minimum tax purposes, without the usual section 56 adjustment. (3) Definitions. (A) "Reuse and recycling property" means machinery and equipment (not buildings or real estate), including necessary software, used exclusively to collect, distribute, or recycle qualified reuse and recyclable materials — but not rolling stock or other equipment used just to transport those materials. (B) "Qualified reuse and recyclable materials" means scrap plastic, glass, textiles, rubber, packaging, recovered fiber, scrap metal (ferrous or nonferrous), or "electronic scrap" — meaning cathode ray tubes, flat panel screens, or similar video displays over 4 inches diagonally, or central processing units — generated by an individual or business. (C) "Recycling" or "recycle" means the process, including sorting, of turning worn-out or extra materials into commodities that meet a specification and can replace virgin materials in making consumer and commercial products, including packaging. (n) Special allowance for qualified production property (1) In general. For "qualified production property" of a taxpayer who elects this treatment, the deduction for the year placed in service includes an extra allowance equal to 100 percent of its adjusted basis, and the basis is reduced by that amount before figuring regular depreciation. (2) Qualified production property. (A) This is the part of nonresidential real property that: is covered by this section; is used by the taxpayer as an integral part of a "qualified production activity"; is placed in service in the United States or a U.S. possession; has its original use begin with the taxpayer; has construction that begins after January 19, 2025 and before January 1, 2029; is designated by the taxpayer in the election; and is placed in service before January 1, 2031. If the taxpayer leases the property out, use by the lessee doesn't count as use by the taxpayer for the production-activity test. (B) Special rule for certain acquired property: if the taxpayer buys such property during that same window, the "original use" and "construction begins" requirements are treated as met if the property wasn't used in a qualified production activity by anyone between January 1, 2021 and May 12, 2025, wasn't used by the taxpayer before this purchase, and the purchase meets the same related-party and basis tests from section 179(d) used elsewhere in this section. Written binding contracts fix the acquisition date for testing whether it falls inside or outside that window. (C) This excludes any part of the building used for offices, administration, lodging, parking, sales, research, or software development and engineering activities — anything not tied to actually manufacturing, producing, or refining the product. (D) "Qualified production activity" means manufacturing, producing, or refining a "qualified product," but only if the taxpayer's activities substantially transform the property that becomes that product. (E) "Production" here covers only agricultural production and chemical production — no other activities count as "production." (F) A "qualified product" is any tangible personal property, except food or beverages made in the same building as the retail store where they're sold. (G) The same syndication (sale-leaseback) rule from subsection (k)(2)(E)(iii) applies to the "original use" test here. (H) Treasury may extend the January 1, 2031 placed-in-service deadline for property that otherwise qualifies, if an "act of God" — as defined under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 — kept the taxpayer from placing it in service on time. (3) Deduction allowed in computing minimum tax. This deduction is allowed for alternative minimum tax purposes without the usual section 56 adjustment. (4) Coordination with certain other provisions. (A) For purposes of the bonus-depreciation election-out rules in subsections (k)(7), (l)(3)(D), and (m)(2)(B)(iii), qualified production property is treated as its own separate class, and the taxpayer is treated as having elected out of those other allowances for that class. (B) Qualified production property doesn't count as property required to use the alternative depreciation system under subsection (g); and for the ADS per-property election under (g)(7)(A), it's treated as its own separate piece of nonresidential real property. (5) Recapture. If, within 10 years after being placed in service, qualified production property stops being used in a qualified production activity and starts being used some other productive way, then the property is treated under section 1245 as disposed of at that moment, with the recognized gain treated as at least the amount described in section 1245(a)(1)(A), and the taxpayer's basis and depreciation allowance are adjusted to reflect that recognized amount. (6) Election. (A) The election must identify the nonresidential real property and the specific portion of it covered, and — unless Treasury says otherwise — must be made on the taxpayer's tax return, in whatever manner Treasury prescribes. (B) Once made, the election (and what it designates) can only be changed with IRS consent, which the IRS will give only in extraordinary circumstances. (7) Regulations. Treasury must issue guidance needed to carry out this subsection, including rules on what counts as "substantial transformation," consistent with guidance already used under section 954(d), and rules applying the recapture rule in paragraph (5) when qualified production property changes hands in a tax-free transfer.