Depreciable or Not? What the IRS Says

A good place to start in a discussion of business depreciation is how the IRS defines it:

Section 1.263(a)-2(a) provides that capital expenditures include the costs of acquisition, construction, or erection of buildings, machinery and equipment, furniture and fixtures, and similar property having a useful life substantially beyond the taxable yeari.

The IRS publication at the reference above will make your eyes gloss over when they use the power company and telephone poles as an example. For most business owners, capital assets involve buildings, vehicles, major equipment, and in some cases intellectual property. You may need to consult with a tax advisor or CPA.

IRS Topic 704 Depreciation explains what you can and cannot depreciate with the usual “there are exceptions” stuff that may require advice. Depending on the property and its value, there is Section 179 that allows you to deduct all or part of the cost of the property in the year in which it is purchased. You need to get advice on this if the value is high, while things like computers and printers often qualify and do not have to be depreciated. This deduction is limited to taxable income.

There is also another 100% depreciation deduction allowance for certain new and used items that you can use after taking the Section 179 deduction. The rules for this are explained in the PDF document at reference 1 below. Again, taking advantage of these accelerated depreciation deductions should be carefully researched with expert advice to avoid future penalties and interest if they are reversed.

What Can You Depreciate?

Property that you can depreciate includes machinery, vehicles, equipment, buildings, and furniture. Property such as vehicles that may be used partially for personal use would require determination of the business portion of use to calculate depreciation. For real estate, only structures, not land, are depreciable.

Property that meets all these requirements may be depreciated:

  • You must own the property
  • It must be used in a business or income-producing activity.
  • You must be able to determine its useful life.
  • It must be expected to last more than one year.
  • It cannot be excepted property. Excepted property includes certain intangible property, some term interests, equipment used to build capital improvements, and property placed in service and disposed of in the same yearii.

The advice of a tax expert or CPA is important in this regard. Mistakes can come back to haunt you in future years.

New in 2021

The Section 179 deduction limits set to begin in 2021:

  • The maximum Section 179 deduction is $1,050,000.
  • The maximum Section 179 deduction for sport utility vehicles placed in service in tax years beginning in 2021 is $26,200.

These numbers can change from year to year, so tax advice is suggested before depreciation decisions.

Depreciation is a tool that provides flexibility in moving deductions into future years, especially valuable when business income growth is anticipated. Get more information and depreciation tips at Tax Hive.

i Capital Expenditures – IRS.gov

ii Publication 946, How to Depreciate Property – IRS.gov

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