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 2011 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.
Special depreciation allowance for certain qualified property acquired after September 8,
2010.
(p36)You may be able to take a 100% special depreciation allowance for certain qualified property acquired after September 8, 2010, and placed in service before January 1, 2012. See
Claiming the Special Depreciation Allowance, later.
Extension of special depreciation allowance for certain qualified property acquired after December 31,
2007.
(p36)You may be able to take a 50% special depreciation allowance for certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2013. See
Claiming the Special Depreciation Allowance, later.
Expiration 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,
2011.
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.
Useful 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.
You 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 bought immature livestock for drafting purposes, depreciation begins when they can be worked. If you bought immature livestock for dairy purposes, depreciation begins when they can be milked. If you bought immature livestock for breeding purposes, depreciation begins when they can be bred. 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.
To 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.
You 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_publink1000218168You can depreciate permanent improvements you make to business property you rent from someone
else.
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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