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How to Depreciate Business Property

Overview1

 

Depreciation is an income tax deduction that allows taxpayers to recover the cost or other basis of certain property. It is an annual allowance for the deterioration or obsolescence of the property.

 

Most types of tangible property, except land, are depreciable, e.g. buildings, machinery, vehicles, furniture, and equipment. In order to take advantage of property depreciation deductions, the property must meet all the following requirements.

 

·

The taxpayer must own the property. (Taxpayers may also depreciate any capital improvements for property the taxpayer leases.)

 

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The taxpayer must use the property in business or in an income-producing activity. (If a taxpayer uses a property for business and for personal purposes, the taxpayer can only deduct depreciation based on the business use of that property.)

 

·

Certain term interests.

 

Depreciation begins when a taxpayer places property in service for use in a trade or business, or for the production of income. The property ceases to be depreciable when the taxpayer has fully recovered the property’s cost or other basis or when the taxpayer retires it from service, whichever happens first.

 

A taxpayer must identify several items to ensure the proper depreciation of a property, including.

 

·

The depreciation method for the property

 

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The class life of the asset

 

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Whether the property is “Listed Property”

 

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Whether the taxpayer elects to expense any portion of the asset

 

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Whether the taxpayer qualifies for any “bonus” first year depreciation

 

·

The depreciable basis of the property

 

The Modified Accelerated Cost Recovery System (MACRS) is the proper depreciation method for most property. A taxpayer must use Form 4562, Depreciation and Amortization, to report depreciation on a tax return.

 

MACRS Depreciation Calculation, Percentage Table Guide for General Depreciation System and Alternative Depreciation System2

 

Tables 1, 2 and 3 are used to locate which table you are to use, (A-1 through A-20), to find the percentage rate of depreciation on property. Table 1 is used for all property other than residential rental and nonresidential real property. Table 2 is used for residential rental and nonresidential real property. And Table 3 is for income inclusion amount rates for MACRS leased listed property.

 

Table 1. Use this table to find the correct percentage table to use for any property other than residential rental and nonresidential real property. (Use Table 2 for residential rental and nonresidential real property).

 

 

 

 

Table 2. Use this table to find the correct percentage table to use for residential rental and nonresidential real property. (Use Table 1, above, for all other property).

 

 

 

 

Table 3. Income Inclusion Amount Rates for MACRS Leased Listed Property

 

 

 

 

Table A-1. Determine the percentage rate used in calculating the depreciation of property for 3, 5, 7, 10, 15, and 20-year property using the half-year convention, and the corresponding percentages for years 1 through 21 under each category of recovery period.

 

 

 

 

Table A-2. Determine the percentage rate used in calculating the depreciation of property for 3, 5, 7, 10, 15, and 20-year property using the mid-quarter convention and placed in service in the first quarter, and the corresponding percentages for years 1 through 21 under each category of recovery period.

 

 

 

 

Table A-3. Determine the percentage rate used in calculating the depreciation of property for 3, 5, 7, 10, 15, and 20-year property using the mid-quarter convention and placed in service in the second quarter, and the corresponding percentages for years 1 through 21 under each category of recovery period.

 

 

 

 

Table A-4. Determine the percentage rate used in calculating the depreciation of property for 3, 5, 7, 10, 15, and 20-year property using the mid-quarter convention and placed in service in the third quarter, and the corresponding percentages for years 1 through 21 under each category of recovery period.

 

 

 

 

Table A-5. Determine the percentage rate used in calculating the depreciation of property for 3, 5, 7, 10, 15, and 20-year property using the mid-quarter convention and placed in service in the fourth quarter, and the corresponding percentages for years 1 through 21 under each category of recovery period.

 

 

 

 

Table A-6. Table A-6 is for residential rental property using the mid-month convention and straight line depreciation—27.5 years, and lists the corresponding percentages for years 1 through 29 by month placed in service.

 

 

 

 

Table A-7. Determine the percentage rate used in calculating the depreciation of property for nonresidential real property, using the mid-month convention and straight line depreciation—31.5 years, and the corresponding percentages for years 1 through 33 by month placed in service.

 

 

 

 

Table A-7a. Shows the percentage rate used in calculating the depreciation of property for nonresidential real property, using the mid-month convention and straight line depreciation—39 years, and lists the percentages for years 1, 2-39, and 40 by month placed in service.

 

 

 

 

Table A-8. Determine the percentage rate used in calculating the depreciation of property for property based on the straight line method of depreciation using the half-year convention. This section of the table is for years 1 through 10 with recovery periods from 2.5 years to 9.5 years.

 

 

 

 

Table A-8 (continued). This section of the table is for years 1 through 18 with recovery periods from 10 years to 17 years.

 

 

 

 

Table A-9. Determine the percentage rate used in calculating the depreciation of property for property based on the straight line method of depreciation using the mid-quarter convention and placed in service in the first quarter. This section of the table is for years 1 through 10 with recovery periods from 2.5 years to 9.5 years.

 

 

 

 

Table A-9 (continued). This section of the table is for years 1 through 18 with recovery periods from 10 years to 17 years.

 

 

 

 

Table A-10. Determine the percentage rate used in calculating the depreciation of property for property based on the straight line method of depreciation using the mid-quarter convention and placed in service in second quarter. This section of the table is for years 1 through 10 with recovery periods from 2.5 to 9.5 years.

 

 

 

 

Table A-10 (continued). This section of the table is for years 1 through 18 with recovery periods from 10 years to 17 years.

 

 

 

 

Table A-11. Determine the percentage rate used in calculating the depreciation of property for property based on the straight line method of depreciation using the mid-quarter convention and placed in service in the third quarter. This section of the table is for years 1 through 11 with recovery periods from 2.5 to 9.5 years.

 

 

 

 

Table A-11 (continued). This section of the table is for years 1 through 18 with recovery periods from 10 years to 17 years.

 

 

 

 

Table A-12. Determine the percentage rate used in calculating the depreciation of property for property based on the straight line method of depreciation using the mid-quarter convention and placed in service in the fourth quarter. This section of the table is for years 1 through 11 with recovery periods from 2.5 to 9.5 years.

 

 

 

 

Table A-12 (continued). This section of the table is for years 1 through 18 with recovery periods from 10 years to 17 years.

 

 

 

 

Table A-13. Shows the percentage rate used in calculating the depreciation of property for property based on the straight line method of depreciation, using the mid-month convention and lists for years 1, 2-40, and 41 by month placed in service.

 

 

 

 

Table A-14. Lists the percentages for property based on the 150% declining balance method using the half-year convention and lists for years 1 through 10 with recovery periods of 2.5 to 9.5 years.

 

 

 

 

Table A-14 (continued). This section of the table is for years 1 through 18 with recovery periods of 10 to 17 years.

 

 

 

 

Table A-15. Determine the percentage rate used in calculating the depreciation of property for property based on the 150% declining balance method of depreciation using the mid-quarter convention, placed in service in the first quarter. This section of the table is for years 1 through 10 with recovery periods from 2.5 to 9.5 years.

 

 

 

 

Table A-15 (continued). This section of the table is for years 1 through 18 with recovery periods from 10 to 17 years.

 

 

 

 

Table A-16. Determine the percentage rate used in calculating the depreciation of property for property based on the 150% declining balance method of depreciation using the mid-quarter convention, placed in service in the second quarter. This section of the table is for years 1 through 10 with recovery periods from 2.5 to 9.5 years.

 

 

 

 

Table A-16 (continued). This section of the table is for years 1 through 18 with recovery periods from 10 to 17 years.

 

 

 

 

Table A-17. Determine the percentage rate used in calculating the depreciation of property for property based on the 150% declining balance method of depreciation using the mid-quarter convention, placed in service in the third quarter. This section of the table is for years 1 through 11 with recovery periods from 2.5 to 9.5 years.

 

 

 

 

Table A-17 (continued). This section of the table is for years 1 through 18 with recovery periods from 10 to 17 years.

 

 

 

 

Table A-18. Determine the percentage rate used in calculating the depreciation of property for property based on the 150% declining balance method of depreciation using the mid-quarter convention, placed in service in the fourth quarter. This section of the table is for years 1 through 11 with recovery periods from 2.5 to 9.5 years.

 

 

 

 

Table A-18 (continued). This section of the table is for years 1 through 18 with recovery periods from 10 to 17 years.

 

 

 

 

Table A-19, Amount A Percentages. The last two tables are for determining the percentages used for depreciation on leased listed property. They each list the recovery periods of property under the alternative depreciation system for less than 7 years, 7 to 10 years, and more than 10 years, and determine the percentage for each by the first tax year during the lease in which business use is 50% or less.

 

 

 

 

Table A-20, Amount B Percentages.

 

 

 

 

What is the Depreciable Life of an Asset? Table of Class Lives and Recovery Periods.3

 

Table B-1, below, lists the recovery periods for specific depreciable assets used in all business activities. The table lists the asset class, asset description, recovery periods for class life, general depreciation system (MACRS) and alternative depreciation system.

 

 

Table B-1.

 

 

 

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1    IRS. "A Brief Overview of Depreciation." Small Business and Self-Employed Tax Center.

2    IRS Pub. 946.

3    Id.