Depreciation is an annual income tax deduction that allows you to recover the cost of certain property over the time you use the property. It is an allowance for the wear and tear, deterioration, or obsolescence of the property.
In order to be “depreciable“, the property must meet all the following requirements:
- be used in a trade or business or income-producing activity.
- have a limited useful life (e.g., land would not qualify), and must be expected to last more than one year
- be property you own
You can depreciate most types of tangible property, such as buildings, machinery, vehicles, furniture, and equipment as well as certain intangible property, such as patents, copyrights, and computer software. You can depreciate leased property only if you retain the incidents of ownership in the property and permanent improvements you make to business property you rent from someone else.
The initial basis for depreciation purposes is cost of the asset; however, the lesser of cost or fair market value at conversion is used for personal assets converted to a business use.
You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most property. Taxpayers can also benefit from the 50% bonus depreciation. Please note that the bonus depreciation will decrease to 40% in 2018, 30% in 2019 and will no longer be a tax benefit starting in 2020.
See also tax reform
I created this blog to help understand certain basic aspects of U.S. tax law. Of course, each situation is unique and nothing that is on this site will ever replace the expert advice of a tax professional.
Please do not hesitate to contact me should you have any question