Qualified Indian reservation property that is placed in service after 1993 and before January 1, 2012 is eligible for special MACRS recovery periods that result in faster writeoffs. This allows depreciation to be claimed at an accelerated rate in relation to ordinary MACRS periods. There is no alternative minimum tax depreciation adjustment required.
Before I continue, I’m going to answer the obvious question – before January 1, 2012, why do I care, it’s too late? The answer is: if you have qualified Indian reservation property that you’ve been claiming ordinary MACRS recovery periods on, you can amend a return within three years from the date filed, OR claim catch-up depreciation in the current year. The catch-up depreciation is particularly useful if in the current year you have substantial net profit that’s subject to self-employment tax and income tax. The extra depreciation will help in reducing the current year’s net profit and associated taxes.
It’s surprisingly common for CPAs to be unaware of accelerated depreciation for qualified Indian reservation property. Every year there are numerous CPA prepared tax returns that are eligible for this accelerated depreciation, but do not claim it, resulting in unnecessary self-employment tax and income taxes.
The following table shows the shortened recovery periods:
MACRS Property Class and Recovery Period
|Qualified Indian Reservation Property Recovery Period|
|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|
Qualified Indian reservation property is MACRS 3-, 5-, 7-, 10-, and 20-year property and nonresidential real property that is:
- used predominately in the active conduct of a trade or business within an Indian reservation;
- not used or located outside an Indian reservation on a regular basis;
- not acquired (directly or indirectly) from a related person; and
- not used for certain gaming purposes.
You or any owner of the business does not have to be a Native American. The property needs to reside on an Indian reservation or be located within an Indian reservation on a regular basis. Real property you rent to others that is located on an Indian reservation is also eligible for the accelerated recovery periods.
The following property is not qualified property.
- Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property.
- Property acquired directly or indirectly from a related person.
- Property placed in service for purposes of conducting or housing class I, II, or III gaming activities.
- Any property you must depreciate under ADS. Determine whether property is qualified without regard to the election to use ADS and after applying the special rules for listed property not used predominantly for qualified business use.
If the preceding requirements have been met, and you wish to claim catch-up depreciation in the current year (unclaimed Indian depreciation from prior years), you must file Form 3115 – Application for Change in Accounting Method. I’ve provided a PDF file for an example of Form 3115 in current context. Do not use this as is. You must consult a tax professional as your situation will be unique. Form 3115 for qualified Indian reservation depreciation catch-up.
Wade Cicrich, CPA