Publication 225
taxmap/pubs/p225-029.htm#en_us_publink1000218127taxmap/pubs/p225-029.htm#en_us_publink1000251226Increased section 179 expense deduction dollar limits.(p36)
The maximum amount you can elect to deduct for most section 179
property you placed in service in 2010 is $500,000. This limit is reduced by the
amount by which the cost of the property placed in service during the tax year
exceeds $2 million. See
Dollar Limits under
Section 179 Expense Deduction, later.
Extension of special depreciation allowance for certain qualified
property acquired after December 31, 2007.(p36)
You may be able to take a special depreciation allowance for
certain qualified property acquired after December 31, 2007, and placed in
service before January 1, 2011. See
Claiming the Special Depreciation Allowance, later.
Expiration of the special depreciation allowance for qualified
disaster assistance property.(p36)
The special depreciation allowance will not apply to qualified
disaster assistance property placed in service in federally declared disaster
areas where the disaster occurred after December 31, 2009.
taxmap/pubs/p225-029.htm#en_us_publink1000251238Certain property eliminated from the definition of listed property.(p36)
For tax years beginning after 2009, cellular telephones and similar
telecommunications equipment have been removed from the definition of listed
property.
taxmap/pubs/p225-029.htm#en_us_publink1000218135Expiration of the 5-year recovery period for certain machinery
and equipment.(p36)
Certain machinery or equipment used in a farming business and
placed in service after December 31, 2009, will no longer be treated as 5-year
property under MACRS.
 | At the time this publication went to print, Congress was
considering legislation that would do the following.
- Extend the treatment of certain machinery or equipment
used in a farming business as 5-year property under MACRS for property placed in
service after December 31, 2009, and before January 1, 2011.
- Extend the special depreciation allowance for qualified
disaster assistance property placed in service in federally declared disaster
areas where the disaster occurred after December 31, 2009, and before January 1,
2011.
To find out whether the legislation has been enacted, go
to IRS.gov. |
taxmap/pubs/p225-029.htm#en_us_publink1000252225Expiration of the special depreciation allowance for specified
Gulf Opportunity (GO) Zone Extension property.(p36)
The special depreciation allowance will not apply to specified
GO Zone Extension property placed in service after December 31, 2010.
If you buy or make improvements to farm property such as machinery,
equipment, livestock, or a structure with a useful life of more than a year, you
generally cannot deduct its entire cost in one year. Instead, you must spread
the cost over the time you use the property and deduct part of it each year. For
most types of property, this is called depreciation.
This chapter gives information on depreciation methods that generally
apply to property placed in service after 1986. For information on depreciating
pre-1987 property, see Publication 534, Depreciating Property Placed in Service
Before 1987.
taxmap/pubs/p225-029.htm#TXMP1a018d97Useful items
You may want to see:
Publication 463
Travel, Entertainment, Gift, and Car Expenses 534
Depreciating Property Placed in Service Before 1987 535
Business Expenses 544
Sales and Other Dispositions of Assets 551
Basis of Assets 946
How To Depreciate Property Form (and Instructions) T:
(Timber), Forest Activities Schedule 3115:
Application for Change in Accounting Method 4562:
Depreciation and Amortization 4797:
Sales of Business Property See
chapter 16 for information about getting publications and forms.
 | It is important to keep good records for property you depreciate.
Do not file these records with your return. Instead, you should keep them as
part of the permanent records of the depreciated property. They will help you
verify the accuracy of the depreciation of assets placed in service in the
current and previous tax years. For general information on recordkeeping, see
Publication 583, Starting a Business and Keeping Records. For specific
information on keeping records for section 179 property and listed property, see
Publication 946, How To Depreciate Property. |
taxmap/pubs/p225-029.htm#en_us_publink1000218138This overview discusses basic information on the following.
- What property can be depreciated.
- What property cannot be depreciated.
- When depreciation begins and ends.
- Whether MACRS can be used to figure depreciation.
- What is the basis of your depreciable property.
- How to treat repairs and improvements.
- When you must file Form 4562.
- How you can correct depreciation claimed incorrectly.
You can depreciate most types of tangible property (except land),
such as buildings, machinery, equipment, vehicles, certain livestock, and
furniture. You can also depreciate certain intangible property, such as
copyrights, patents, and computer software. To be depreciable, the property must
meet all the following requirements.
- It must be property you own.
- It must be used in your business or income-producing activity.
- It must have a determinable useful life.
- It must have a useful life that extends substantially beyond
the year you place it in service.
To claim depreciation, you usually must be the owner of the property.
You are considered as owning property even if it is subject to a debt.
taxmap/pubs/p225-029.htm#en_us_publink1000218141You can depreciate leased property only if you retain the incidents
of ownership in the property. This means you bear the burden of exhaustion of
the capital investment in the property. Therefore, if you lease property from
someone to use in your trade or business or for the production of income, you
generally cannot depreciate its cost because you do not retain the incidents of
ownership. You can, however, depreciate any capital improvements you make to the
leased property. See
Additions and Improvements under
Which Recovery Period Applies in chapter 4 of Publication 946.
If you lease property to someone, you generally can depreciate
its cost even if the lessee (the person leasing from you) has agreed to
preserve, replace, renew, and maintain the property. However, you cannot
depreciate the cost of the property if the lease provides that the lessee is to
maintain the property and return to you the same property or its equivalent in
value at the expiration of the lease in as good condition and value as when
leased.
taxmap/pubs/p225-029.htm#en_us_publink1000218142Generally, if you hold business or investment property as a life
tenant, you can depreciate it as if you were the absolute owner of the property.
See
Certain term interests in property, later, for an exception.
To claim depreciation on property, you must use it in your business
or income-producing activity. If you use property to produce income (investment
use), the income must be taxable. You cannot depreciate property that you use
solely for personal activities. However, if you use property for business or
investment purposes and for personal purposes, you can deduct depreciation based
only on the percentage of business or investment use.
taxmap/pubs/p225-029.htm#en_us_publink1000218144If you use your car for farm business, you can deduct depreciation
based on its percentage of use in farming. If you also use it for investment
purposes, you can depreciate it based on its percentage of investment use.
taxmap/pubs/p225-029.htm#en_us_publink1000218145If you use part of your home for business, you may be able to
deduct depreciation on that part based on its business use. For more
information, see
Business Use of Your Home in
chapter 4.
You can never depreciate inventory because it is not held for
use in your business. Inventory is any property you hold primarily for sale to
customers in the ordinary course of your business.
taxmap/pubs/p225-029.htm#en_us_publink1000218147Livestock purchased for draft, breeding, or dairy purposes can
be depreciated only if they are not kept in an inventory account. Livestock you
raise usually has no depreciable basis because the costs of raising them are
deducted and not added to their basis. However, see
Immature livestock under
When Does Depreciation Begin and End, later, for a special rule.
To be depreciable, your property must have a determinable useful
life. This means it must be something that wears out, decays, gets used up,
becomes obsolete, or loses its value from natural causes.
taxmap/pubs/p225-029.htm#en_us_publink1000218149Irrigation systems and wells used in a trade or business can
be depreciated if their useful life can be determined. You can depreciate
irrigation systems and wells composed of masonry, concrete, tile, metal, or
wood. In addition, you can depreciate costs for moving dirt to construct
irrigation systems and water wells composed of these materials. However, land
preparation costs for center pivot irrigation systems are not depreciable.
taxmap/pubs/p225-029.htm#en_us_publink1000218150In general, you cannot depreciate earthen dams, ponds, and terraces
unless the structures have a determinable useful life.
taxmap/pubs/p225-029.htm#en_us_publink1000218151Certain property cannot be depreciated, even if the requirements
explained earlier are met. This includes the following.
- Land. You can never depreciate the cost of land because land
does not wear out, become obsolete, or get used up. The cost of land generally
includes the cost of clearing, grading, planting, and landscaping. Although you
cannot depreciate land, you can depreciate certain costs incurred in preparing
land for business use. See chapter 1 of Publication 946.
- Property placed in service and disposed of in the same year.
Determining when property is placed in service is explained later.
- Equipment used to build capital improvements. You must add
otherwise allowable depreciation on the equipment during the period of
construction to the basis of your improvements.
- Intangible property such as section 197 intangibles. This
property does not have a determinable useful life and generally cannot be
depreciated. However, see
Amortization, later. Special rules apply to computer software (discussed
below).
- Certain term interests (discussed below).
Computer software is not a section 197 intangible even if acquired
in connection with the acquisition of a business, if it meets all of the
following tests.
- It is readily available for purchase by the general public.
- It is subject to a nonexclusive license.
- It has not been substantially modified.
If the software meets the tests above, it can be depreciated
and may qualify for the section 179 expense deduction and the special
depreciation allowance (if applicable), discussed later.
taxmap/pubs/p225-029.htm#en_us_publink1000218153You cannot depreciate a term interest in property created or
acquired after July 27, 1989, for any period during which the remainder interest
is held, directly or indirectly, by a person related to you. This rule does not
apply to the holder of a term interest in property acquired by gift, bequest, or
inheritance. For more information, see chapter 1 of Publication 946.
taxmap/pubs/p225-029.htm#en_us_publink1000218154You begin to depreciate your property when you place it in service
for use in your trade or business or for the production of income. 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.
taxmap/pubs/p225-029.htm#en_us_publink1000218155Property is placed in service when it is ready and available
for a specific use, whether in a business activity, an income-producing
activity, a tax-exempt activity, or a personal activity. Even if you are not
using the property, it is in service when it is ready and available for its
specific use.
taxmap/pubs/p225-029.htm#en_us_publink1000218156You bought a planter for use in your farm business. The planter
was delivered in December 2010 after harvest was over. You begin to depreciate
the planter for 2010 because it was ready and available for its specific use in
2010, even though it will not be used until the spring of 2011.
If your planter comes unassembled in December 2010 and is put
together in February 2011, it is not placed in service until 2011. You begin to
depreciate it in 2011.
If your planter was delivered and assembled in February 2011
but not used until April 2011, it is placed in service in February 2011, because
this is when the planter was ready for its specified use. You begin to
depreciate it in 2011.
taxmap/pubs/p225-029.htm#en_us_publink1000218157If you acquire an orchard, grove, or vineyard before the trees
or vines have reached the income-producing stage, and they have a preproductive
period of more than 2 years, you must capitalize the preproductive-period costs
under the uniform capitalization rules (unless you elect not to use these
rules). See
chapter 6
for information about the uniform capitalization rules. Your depreciation begins
when the trees and vines reach the income-producing stage (that is, when they
bear fruit, nuts, or grapes in quantities sufficient to commercially warrant
harvesting).
Depreciation for livestock begins when the livestock reaches
the age of maturity. If you acquire immature livestock for draft, dairy, or
breeding purposes, your depreciation begins when the livestock reach the age
when they can be worked, milked, or bred. When this occurs, your basis for
depreciation is your initial cost for the immature livestock.
taxmap/pubs/p225-029.htm#en_us_publink1000218159Continue to claim a deduction for depreciation on property used
in your business or for the production of income even if it is temporarily idle.
For example, if you stop using a machine because there is a temporary lack of a
market for a product made with that machine, continue to deduct depreciation on
the machine.
taxmap/pubs/p225-029.htm#en_us_publink1000218160You stop depreciating property when you have fully recovered
your cost or other basis. This happens when your section 179 and allowed or
allowable depreciation deductions equal your cost or investment in the property.
taxmap/pubs/p225-029.htm#en_us_publink1000218161You stop depreciating property when you retire it from service,
even if you have not fully recovered its cost or other basis. You retire
property from service when you permanently withdraw it from use in a trade or
business or from use in the production of income because of any of the following
events.
- You sell or exchange the property.
- You convert the property to personal use.
- You abandon the property.
- You transfer the property to a supplies or scrap account.
- The property is destroyed.
For information on abandonment of property, see
chapter 8. For information on destroyed property, see
chapter 11 and Publication 547, Casualties, Disasters, and Thefts.
You must use the Modified Accelerated Cost Recovery System (MACRS)
to depreciate most business and investment property placed in service after
1986. MACRS is explained later under
Figuring Depreciation Under MACRS.
You cannot use MACRS to depreciate the following property.
- Property you placed in service before 1987. Use the methods
discussed in Publication 534.
- Certain property owned or used in 1986. See chapter 1 of Publication
946.
- Intangible property.
- Films, video tapes, and recordings.
- Certain corporate or partnership property acquired in a nontaxable
transfer.
- Property you elected to exclude from MACRS.
For more information, see chapter 1 of Publication 946.
taxmap/pubs/p225-029.htm#en_us_publink1000218163To figure your depreciation deduction, you must determine the
basis of your property. To determine basis, you need to know the cost or other
basis of your property.
taxmap/pubs/p225-029.htm#en_us_publink1000218164The basis of property you buy is usually its cost plus amounts
you paid for items such as sales tax, freight charges, and installation and
testing fees. The cost includes the amount you pay in cash, debt obligations,
other property, or services.
There are times when you cannot use cost as basis. In these situations,
the fair market value (FMV) or the adjusted basis of the property may be used.
taxmap/pubs/p225-029.htm#en_us_publink1000218165To find your property's basis for depreciation, you may have
to make certain adjustments (increases and decreases) to the basis of the
property for events occurring between the time you acquired the property and the
time you placed it in service.
taxmap/pubs/p225-029.htm#en_us_publink1000218166After you place your property in service, you must reduce the
basis of the property by the depreciation allowed or allowable, whichever is
greater. Depreciation allowed is depreciation you actually deducted (from which
you received a tax benefit). Depreciation allowable is depreciation you are
entitled to deduct.
If you do not claim depreciation you are entitled to deduct,
you must still reduce the basis of the property by the full amount of
depreciation allowable.
If you deduct more depreciation than you should, you must reduce
your basis by any amount deducted from which you received a tax benefit (the
depreciation allowed).
taxmap/pubs/p225-029.htm#en_us_publink1000218167You generally deduct the cost of repairing business property
in the same way as any other business expense. However, if a repair or
replacement increases the value of your property, makes it more useful, or
lengthens its life, you must treat it as an improvement and depreciate it. Treat
improvements as separate depreciable property. See chapter 1 of Publication 946
for more information.
taxmap/pubs/p225-029.htm#en_us_publink1000218168You can depreciate permanent improvements you make to business
property you rent from someone else.
taxmap/pubs/p225-029.htm#en_us_publink1000218169You repair a small section on a corner of the roof of a barn
that you rent to others. You deduct the cost of the repair as a business
expense. However, if you replace the entire roof, the new roof is considered to
be an improvement because it increases the value and lengthens the life for the
property. You depreciate the cost of the new roof.
taxmap/pubs/p225-029.htm#en_us_publink1000218170Use Form 4562 to claim your deduction for depreciation and amortization.
You must complete and attach Form 4562 to your tax return if you are claiming
any of the following.
- A section 179 expense deduction for the current year or a
section 179 carryover from a prior year.
- Depreciation for property placed in service during the current
year.
- Depreciation on any vehicle or other listed property, regardless
of when it was placed in service.
- Amortization of costs that began in the current year.
For more information, see the Instructions for Form 4562.
taxmap/pubs/p225-029.htm#en_us_publink1000218171If you deducted an incorrect amount of depreciation in any year,
you may be able to make a correction by filing an amended return for that year.
You can file an amended return to correct the amount of depreciation claimed for
any property in any of the following situations.
- You claimed the incorrect amount because of a mathematical
error made in any year.
- You claimed the incorrect amount because of a posting error
made in any year, for example, omitting an asset from the depreciation schedule.
- You have not adopted a method of accounting for the property
placed in service by you in tax years ending after December 29, 2003.
- You claimed the incorrect amount on property placed in service
by you in tax years ending before December 30, 2003.
Note.You have adopted a method of accounting if you used the same
incorrect method of depreciation for two or more consecutively filed returns.
If you are not allowed to make the correction on an amended return,
you may be able to change your accounting method to claim the correct amount of
depreciation. See the Instructions for Form 3115.
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