Depreciation is a tax deduction that lets you recover the cost of certain business or income-producing property over time. Instead of deducting the full cost in one year, you generally spread the deduction across the property's useful life.
Depreciation accounts for the normal wear and tear, deterioration, or aging of property used in a trade, business, rental activity, or farming operation.
What Property Can Be Depreciated?
Both tangible and intangible property may qualify for depreciation or amortization.
Examples of Depreciable Tangible Property
- Buildings (excluding land)
- Machinery
- Vehicles (owned- not leased)
- Furniture
- Equipment
Examples of Depreciable Intangible Property
- Patents
- Copyrights
- Computer software
Can You Depreciate Land?
No. Land itself is not depreciable because it generally does not wear out, become obsolete, or get used up over time.
However, you may be able to depreciate buildings, improvements, or other qualifying assets located on the land if they meet the IRS requirements for depreciation.
What Property Qualifies for Depreciation?
To claim depreciation, all of the following must be true:
- You own the property (not leased).
- You use the property in a business, rental activity, farming operation, or another income-producing activity.
- The property has a determinable useful life.
- The property's useful life is expected to last more than one year.
If property is used for both business and personal purposes, you can generally depreciate only the business-use portion.
What Property Cannot Be Depreciated?
Generally, you cannot depreciate:
- Land
- Property placed in service and disposed of during the same tax year
- Certain term interests
- Equipment used to construct capital improvements (the cost is typically added to the improvement instead)
- Leased property
A property is no longer depreciable once:
- You have fully recovered its cost through depreciation deductions, or
- You permanently stop using it in a business or income-producing activity
Information Needed to Calculate Depreciation
When entering an asset for depreciation, you'll typically need to determine:
- The asset's depreciable basis (generally its cost, adjusted for certain items)
- The depreciation method
- The asset's useful life or recovery period
- Whether the asset is considered listed property
- Whether you are electing to expense part of the asset's cost under Section 179
- Whether the asset qualifies for first-year bonus depreciation
What Is MACRS?
Most business property is depreciated using the Modified Accelerated Cost Recovery System (MACRS).
Under MACRS, assets are assigned a recovery period, such as:
- 3-year property
- 5-year property
- 7-year property
- 10-year property
- And longer recovery periods for certain assets
The recovery period determines how many years it takes to fully depreciate the property.
For detailed rules and property classifications, see IRS Publication 946, How to Depreciate Property.
How Do I Report Depreciation in the Program?
Depreciation is reported on Form 4562, Depreciation and Amortization.
In our software, you can enter depreciation information in the following sections of your federal return:
- Schedule C (Profit or Loss From Business)
- Schedule E (Supplemental Income and Loss, including rentals and royalties)
- Schedule F (Profit or Loss From Farming)
Look for the depreciation or asset entry screens within the applicable income section and enter the details for each depreciable asset.