If property you acquire to use in your business is expected to last more than one year, you generally cannot deduct the entire cost as a business expense in the year you acquire it. You must spread the cost over more than one tax year and deduct part of it each year on Schedule C. This method of deducting the cost of business property is called depreciation.
The discussion here is brief. You will find more information about depreciation in Publication 946.taxmap/pubs/p334-024.htm#en_us_publink100025337
You can depreciate property if it meets all the following requirements.
- It must be property you own.
- It must be used in business or held to produce income. You never can depreciate inventory (explained in chapter 2) because it is not held for use in your business.
- It must have a useful life that extends substantially beyond the year it is placed in service.
- It must have a determinable useful life, which means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. You never can depreciate the cost of land because land does not wear out, become obsolete, or get used up.
- It must not be excepted property. This includes property placed in service and disposed of in the same year.
You cannot depreciate repairs and replacements that do not increase the value of your property, make it more useful, or lengthen its useful life. You can deduct these amounts on line 21 of Schedule C or line 2 of Schedule C-EZ. taxmap/pubs/p334-024.htm#en_us_publink100025339
The method for depreciating most business and investment property placed in service after 1986 is called the Modified Accelerated Cost Recovery System (MACRS). MACRS is discussed in detail in Publication 946. taxmap/pubs/p334-024.htm#en_us_publink100025340
You can elect to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. This deduction is known as the "section 179 deduction." The maximum amount you can elect to deduct during 2008 is generally $250,000 (higher limits apply to certain property). This limit is generally reduced by the amount by which the cost of the property placed in service during the tax year exceeds $800,000. The total amount of depreciation (including the section 179 deduction) you can take for a passenger automobile you use in your business and first place in service in 2008 is $2,960. Special rules apply to trucks and vans. For more information, see Publication 946. It explains what property qualifies for the deduction, what limits apply to the deduction, and when and how to recapture the deduction.
Your section 179 election for the cost of any sport utility vehicle (SUV) and certain other vehicles is limited to $25,000. For more information, see the Instructions for Form 4562 or Publication 946.
You must follow special rules and recordkeeping requirements when depreciating listed property. Listed property is any of the following.
- Most passenger automobiles.
- Most other property used for transportation.
- Any property of a type generally used for entertainment, recreation, or amusement.
- Certain computers and related peripheral equipment.
- Any cellular telephone (or similar telecommunications equipment).
For more information about listed property, see Publication 946.taxmap/pubs/p334-024.htm#en_us_publink100025343
Use Form 4562, Depreciation and Amortization, if you are claiming any of the following.
- Depreciation on property placed in service during the current tax year.
- A section 179 deduction.
- Depreciation on any listed property (regardless of when it was placed in service).
If you have to use Form 4562, you must file Schedule C. You cannot use Schedule C-EZ.