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Rev. date: 12/03/2013


Depreciation

Tax Topic 704
rule
You generally cannot deduct in one year the entire cost of property you purchased and placed in service for use either in your trade or business or to produce income, if the property has a useful life substantially beyond the tax year; instead, you can depreciate such property. That is, you can recover the cost of the property over a number of years by deducting a part of the cost each year. Or, instead of recovering the cost of the property by taking depreciation deductions, you can elect under Code section 179 to recover all or part of the cost of qualifying property, up to a limit, by deducting it in the year you place the qualifying property in service. For more information, refer to Publication 946, How to Depreciate Property.
The kinds of property that you can depreciate include machinery, equipment, buildings, vehicles, and furniture. You cannot claim depreciation on property held for personal purposes. If you use property, such as a car, for both business or investment and personal purposes, only the business or investment use portion may be depreciated. The cost of land is never depreciable, although buildings and certain land improvements may be.
You may depreciate property that meets all five of the following tests:
  1. It must be property you own.
  2. It must be used in a business or income-producing activity.
  3. It must have a determinable useful life.
  4. It must be expected to last more than one year.
  5. It must not be excepted property. Excepted property (as described in Publication 946, How to Depreciate Property) includes certain intangible property, certain term interests, and property placed in service and disposed of in the same year.
Generally, if you are depreciating property you placed in service before 1987, you must use the Accelerated Cost Recovery System (ACRS) or the same method you used in the past. For property placed in service after 1986, you generally must use the Modified Accelerated Cost Recovery System (MACRS).
For more information, refer to Publication 946, How to Depreciate Property, or Publication 534, Depreciating Property Placed in Service Before 1987. You can also find information on depreciation in Publication 527, Residential Rental Property (Including Rental of Vacation Homes), Publication 463, Travel, Entertainment, Gift, and Car Expenses, Publication 587, Business Use of Your Home, and Publication 225, Farmer's Tax Guide.