ATX 2014

Depreciation

Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an allowance for deterioration, age, and obsolescence of property. Taxpayers can take this allowance annually until the cost of the property has been recovered or until the property is no longer used for business purposes.

Most types of tangible property are eligible for depreciation such as buildings, vehicles, office equipment and furniture, and machinery. You can also claim a depreciation allowance for certain intangible assets as well, such as computer software, copyrights,and patents. Land cannot be depreciated.

Requirements for Depreciation Allowance

In order for a taxpayer to qualify for a depreciation deduction, the property must meet all of the following requirements:

The taxpayer must own the property. The taxpayer can also depreciate capital improvements for property a taxpayer leases.
A taxpayer must use the property in business or in an income-producing activity. If the property is used for both business and personal purposes, such as a home office, the taxpayer can only claim depreciation on the percentage of the property used for business.
The property must have a determinable useful life of more than one year. For example, a restaurant can depreciate all of its equipment, tables, glassware and silverware; however, food items cannot be depreciated.

Even if these requirements are met, a taxpayer cannot depreciate the following:

Property placed in service and disposed of in the same year.
Equipment used to build capital improvements. The taxpayer must add the otherwise allowable depreciation of the equipment during the period of construction to the basis of the improvement.
Certain term interests.

Depreciation Allowance Time Frame

Depreciation begins the day the property is placed in service for business or production of income and ends when the property is fully depreciated, sold, or retired, whichever comes first.

The taxpayer must identify several things to insure the proper depreciation of a property, including:

The method of depreciation.
The class life of the property.
Whether the property is "Listed propertyListed Property: passenger automobiles; any other property used for transportation; property of a type generally used for entertainment, recreation or amusement; computers and their peripheral equipment (unless used only at a regular business establishment and owned or leased by the person operating the establishment); and cellular telephones or similar telecommunications equipment. ."
Whether the taxpayer elects to expense any portion of the asset.
Whether the taxpayer qualifies for any extra first year depreciation.
The depreciable basis for the property.

See IRS Publication 946, How to Depreciate Property.