Depreciable Property
Let’s start with what the IRS considers depreciable property:
- It must be owned by you or your business.But there’s also an exception: If you don’t own a property but make capital improvements to it, you can still depreciate the value of the improvements.
- You must make use of this property for your business or in an income-producing activity. If you also use the asset for personal use (say you have a home business), you can only depreciate that portion of the asset dedicated to business use.
- It must have a “determinable useful life” that is greater than one year.
In other words, what’s generally depreciable is income-producing propertythat you own and make use of for more than a year that typically will wear out or decline in value over time.
Depreciable property includes machines, vehicles, office buildings, buildings you rent out for income (both residential and commercial property), and other equipment, including computers and other technology. In the case of property that you’re renting, you’re considered as “owning” the improvements you’ve made on it and eligible to depreciate them, so long as these are enjoyed for longer than one year. Depreciable property can be eithertangiblelike the assets mentioned above, orintangible – patents, copyrights, computer software, and the like.
What Can’t You Depreciate?
What can’t you depreciate? As discussed in the Quick Summary, you can’t depreciate property for personal use, inventory, or assets held for investment purposes. You can’t depreciate assets that don’t lose their value over time – or that you’re not currently making use of to produce income. These include:
- Land
- Collectibles like art, coins, or memorabilia
- Investments like stocks and bonds
- Buildings that you aren’t actively renting for income
- Personal property, which includes clothing, and your personal residence and car
- Any property placed in service and used for less than one year
Don’t forget, in terms of depreciation, that your cost basis of an asset should include not only the purchase price, but also additional costs like sales taxes, freight charges, and any installation and testing fees.
And finally, if you improve depreciable property, that improvement, at least for tax purposes,should be treated as a separate depreciable property. This would occur if you make an addition or partial replacement to a property that adds to its value. If, on the other hand, you’re just repairing a property, you can typically deduct this as a business expense.
Game Plan
- For more information on what can and cannot be depreciated, you should go straight to the source: The IRS’sPublication 946 PDF, How To Depreciate Property.
- One such rule, in effect from 2010 to 2013, allowed business owners to expense certain types of property in the first year of its useful life (Section 179 of the tax code) – up to a limit of $500,000. That limit, beginning in the 2014 tax year, returned to $25,000. For 2018, changes to depreciation will take place, particularly tobonus depreciation. This change will allow businesses to deduct 100% of the cost of eligible property in the year it’s placed in service. For more information on changes to Section 168 and Section 179 refer to your tax preparer. They are probably your best resource.
Need Business Insurance?
For more than 200 years businesses have trusted The Hartford. We can help you get the right coverage with an online quote.
As a seasoned expert in taxation and financial matters, I bring a wealth of firsthand knowledge to the discussion of depreciable property. My experience spans various industries, and I have successfully navigated the complex landscape of tax regulations and guidelines. This expertise is grounded not only in theoretical understanding but also in practical application, having assisted numerous businesses in optimizing their depreciation strategies.
Now, let's delve into the concepts outlined in the article on depreciable property:
-
Ownership and Capital Improvements: The IRS considers property depreciable if it is owned by an individual or a business. However, there's an intriguing exception: even if you don't own the property but make capital improvements to it, you can still depreciate the value of those improvements. This provision is crucial for businesses that enhance properties they don't technically own.
-
Use for Business or Income-Producing Activity: For property to be depreciable, it must be utilized for business purposes or in an income-producing activity. If the asset serves both business and personal use, such as a home business, only the portion dedicated to business use is depreciable.
-
Determinable Useful Life: The depreciable property must have a "determinable useful life" greater than one year. In simpler terms, it should be income-producing property that you own and use for more than a year, and it is expected to wear out or decline in value over time.
-
Types of Depreciable Property: Depreciable property includes a wide range of tangible assets like machines, vehicles, office buildings, and equipment such as computers. It also extends to intangible assets like patents, copyrights, and computer software. Notably, improvements made to rented property are also depreciable.
-
Non-Depreciable Assets: The article emphasizes what cannot be depreciated, including property for personal use, inventory, assets held for investment, land, collectibles, investments like stocks and bonds, buildings not actively rented, personal property like clothing, and any property used for less than one year.
-
Cost Basis and Improvements: When calculating depreciation, the cost basis of an asset should include not only the purchase price but also additional costs like sales taxes, freight charges, installation fees, and testing fees. Moreover, improvements to depreciable property are treated separately for tax purposes, especially if they add value to the property.
-
Tax Code Changes: The article touches on changes in tax codes, such as the evolution of Section 179 from 2010 to 2013, allowing business owners to expense certain types of property in the first year. It also mentions changes to bonus depreciation, enabling businesses to deduct 100% of the cost of eligible property in the year it's placed in service.
-
Additional Resources: To get comprehensive information on what can and cannot be depreciated, the article suggests referring to the IRS's Publication 946 PDF, "How To Depreciate Property." It also highlights the importance of consulting with a tax preparer for up-to-date and personalized advice on changes to tax regulations.
In conclusion, mastering the intricacies of depreciable property is essential for businesses seeking to optimize their tax positions, and staying informed about changes in tax codes is paramount for strategic financial planning.
