Depreciation is a tax deduction for taxpayers to regain the cost or other basis of certain property. It is an annual allowance for the use of a property that has damage, wear and tear or deterioration.
Examples of depreciable tangible property consists of:
Examples of depreciable intangible property consists of:
- Computer Software
You cannot depreciate land.
In order to depreciate a property, it must meet all of the following requirements:
- The taxpayer must own the property.
- The property must be used in a business or an income producing activity by the taxpayer. If the property is used in a business and for personal use, you can only depreciate the business use of the property.
- The property must have a useful life of more than one year.
You cannot depreciate property that was placed in service and disposed of in the same tax year, equipment used to build capital improvements or certain term interests. A property is no longer depreciable if a taxpayer has fully recovered the property's cost or when the taxpayer stops using it, whichever comes first.
Items that must be identified in order to properly depreciate a property are:
- Depreciation method
- Useful Life
- Is the property "Listed Property"?
- Will taxpayer expense any portion of the asset?
- Does taxpayer qualify for "bonus" first year depreciation?
- Depreciable basis of property
MACRS- Most property is depreciated using the MACRS (Modified Accelerated Cost Recovery System) method. For more information on how to depreciate property properly see IRS Pub 946, How to Depreciate Property. See the section of MACRS for a list of property and their class life (ex. 3-year, 5-year, etc.). Class life or useful life refers to how long it takes that property to fully depreciate.
To report depreciation on an item within our program, use Form 4562. You will find the depreciation entries within the Schedule C (Profit or Loss from a Business), Schedule E (Rents and Royalties) and Schedule F (Profit or Loss from Farming) sections in the Income section of the Federal Return.