Depreciation Overview

Property acquired for business use, rental use, or any other income producing use that is expected to last more than one year cannot be deducted as a business expense all in the year it was aquired.  This is where depreciation comes into play.  You must deduct the expense over the usual life of the asset.  The useful life of an asset is defined by the IRS and gets deducted on form 4562. 

For property to be depreciated on your tax return you must own the property, it must be used on your business or rental activity, it must have a determinable useful life, and it must be expected to last more than one year.  Some examples of depreciable property are, buildings, computers, autos, copy machines, furniture, and large equipment.  There are some things that are not depreciable, such as land, property placed in service and disposed of in the same year, and some intangibles.  If you have a home that is used in both business and personal, then only the business portion can be depreciated. 

In order to compute deprecation you must know when the asset was placed in service, what the basis of the asset is (usually the purchase price of the asset), and the appropriate depreciation method and usefull life.  When an asset was placed in service isn’t always the date it was purchased.  If you buy a car for your business on June 15th, but don’t start using it in your business until August 1st, then you must start depreciating it as of August 1st, not June 15th.  Also, if you have a rental house then depreciation should start as soon as it is available for rental, even if it has not yet been rented. 

There is a way for some taxpayers to elected to expense all or some of an assets cost in the year of purchase using Section 179.  Section 179 allows you to deduct all of the depreciation up front rather than spreading it over the useful life.  Section 179 may only be taken on business assets, not rental assets.  

For more information on Section 179 and general deprecation you should consult your tax professional.


About the author

Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. Since 2002, he has owned his own small business, Huddleston Tax CPAs. He is a graduate of Washington State University and the University of Washington School of Law.