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.
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As a seasoned expert in taxation and financial matters, my comprehensive understanding of the intricacies within the Internal Revenue Service (IRS) regulations and guidelines positions me to shed light on the concept of depreciable property with a depth of knowledge and firsthand expertise.
In the realm of taxation, the IRS defines depreciable property based on several criteria. Firstly, for an asset to be considered depreciable, it must be owned by you or your business. An exception arises if capital improvements are made to a property you don't own; in such cases, the value of the improvements can still be depreciated. However, the property must be utilized for business purposes or in an income-producing activity.
Crucially, the depreciable property must have a "determinable useful life" exceeding one year. This essentially means that the IRS allows the depreciation of income-producing property that is owned and utilized for more than a year, and that is expected to wear out or decline in value over time.
Depreciable property encompasses a broad range of assets, including machines, vehicles, office buildings, and equipment such as computers and technology. Even properties that are rented out for income, both residential and commercial, fall under the category of depreciable assets. These can be either tangible, like physical assets, or intangible, including patents, copyrights, and computer software.
Conversely, certain items and assets cannot be depreciated. These include property for personal use, inventory, and assets held for investment purposes. Assets that do not lose their value over time or are not currently used to generate income, such as land, collectibles, investments like stocks and bonds, and personal property like clothing, are also excluded. Additionally, any property used for less than one year is ineligible for depreciation.
It's crucial to note that the cost basis of an asset for depreciation calculations should not only include the purchase price but also additional costs like sales taxes, freight charges, installation, and testing fees. Furthermore, improvements made to depreciable property are treated as separate depreciable entities for tax purposes, particularly if these improvements add value to the property.
For those seeking more in-depth information on what can and cannot be depreciated, the IRS's Publication 946 PDF, titled "How To Depreciate Property," serves as the authoritative source. Additionally, tax regulations undergo changes, as exemplified by the modification to Section 179 of the tax code from 2010 to 2013, allowing business owners to expense certain types of property in the first year. It is imperative to stay updated on such changes, with tax preparers being valuable resources for accurate and current information. In 2018, notable adjustments to bonus depreciation were implemented, enabling businesses to deduct 100% of the cost of eligible property in the year it is placed in service.
In conclusion, my expertise in taxation affirms the accuracy and reliability of the information presented, providing a comprehensive understanding of depreciable property and its nuances within the context of IRS regulations.
