Over time, business equipment ages, deteriorates or becomes obsolete. You can get back a portion of your cost for certain property by taking deductions for depreciation.
Generally, to depreciate your assets, the property must be used in your business or income-producing activity, must have a determinable useful life of more than one year, and must be property you own.
You can begin to depreciate the property as soon as it is available for a specific use in your business or income-producing activity. You stop depreciating the property when you've recovered its cost (or other basis), or when you retire it from service, whichever comes first.
The kind of property you own affects how you can claim a depreciation deduction. Property falls into two categories: tangible and intangible.
Tangible property can be seen or touched, such as buildings, cars, machinery or equipment. If you own tangible property that you use for both personal and business purposes, you may take deductions based only on the business use portion of the property. Certain types of property can never be depreciated. For example, you can't depreciate the cost of land because it does not wear out or become obsolete. The cost of inventory does not qualify for the depreciation deduction, either.
Intangible property is generally any property that can't be seen or touched, such as copyrights, franchises, and patents. Certain types of intangible property cannot be depreciated, but must be amortized instead.
To see if you can claim depreciation deductions, get Form 4562, "Depreciation and Amortization," and its instructions.
You may be able to deduct all or part of the cost of certain qualifying property used in your business in the year you placed it in service by claiming a "section 179" deduction ("Election to Expense Certain Business Assets"). The advantage of claiming the section 179 deduction is that you get to deduct more up front. Like depreciation deductions, you can claim the section 179 deduction only when your property is ready to be used in your business or income-producing activity.
There are limitations. For example, if the cost of all qualifying property in 2003 is $400,000 or more, the maximum section 179 deduction you can take is reduced by the amount over $400,000. When the cost of all qualifying property in 2003 exceeds $500,000, then no section 179 deduction is allowed. The maximum section 179 deduction for 2003 is $100,000. You cannot deduct costs in excess of your taxable income, which includes your trade and business income, plus your wages and salaries for the year. You use Form 4562 to make the election to claim a section 179 deduction or carryover.
See IRS Publication 946, "How To Depreciate Property" and IRS Publication 535, "Business Expenses."
Information courtesy of the Internal Revenue Service.
