DEPRECIATION EXPENSE DEDUCTION: IRS PUBLICATION #946
What is depreciation?
Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property in your business or rental real estate activity. It is an allowance for the normal waer and tear, deterioration, or obsolescence of the property over time.
What Types of Property Can Be Depreciated?
You can depreciate most types of tangible property (except land which is never depreciated) such as:
3-Fixtures & Furniture
5-Vehicles (PLEASE SEE MY ARTICLE ON AUTO EXPENSE DEDUCTION for specific rules)
To be depreciable, the property must meet ALL of the following requirements:
1-You must OWN the property (you cannot depreciate leased property)
2-It must be used in a trade or business or income-producing activity
3-It must have a determinable useful life
4-It must be expected to last more than one year.
When Does Depreciation Begin and End?
You begin to depreciate property when you place it in service for use in your business or income-producing activity.
Date placed in service is when the property is ready and available for its specific use in the intended activity.
You can continue to depreciate temporarily idle property (not in use).
You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first.
What Is The Depreciable Basis Of Property
Depreciable Basis is the total cost (if purchased) incurred to get the property ready and available for service.
For property acquired by gift, inherited, or converted from personal use to business or rental use, there are specific basis rules that you must use.
You may also have to make certain adjustments (increases or decreases) to the initial and or ongoing basis of property for events occurring between the time you acquired the property and the time you placed it in service.
You must reduce your basis by the depreciation allowed or allowable each year to arrive at the "adjusted basis".
SPECIAL IRS RULES
The IRS has special rules (that often change each year) for the following: (IRS Publication #946 provides much detail about various depreciation topics)
1-Electing Section #179 Deduction
2-Claiming the Special Depreciation Allowance
3-Different Depreciation Systems under MACRS (GDS or ADS)
4-Property Classes; Recovery Periods; Depreciation Conventions and Methods; Vehicle Depreciation Limits; and Listed Property.
You will need to keep a record for EACH piece of property with the following information:
2-Activity used in
3-How Acquired (Purchased, Gift, Inherited, Converted form personla to business use)
4-Initial Cost or Other Basis AND Additional Adjustments Before Placed In Service
5-Date Placed In Service
6-Business Percentage Use (each year)
NOTE: Each year's tax return should provide an updated Deprecition Schedule or Worksheet.
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