Depreciation: Understanding the Basics for Tax Purposes
Depreciation is a tax deduction that allows businesses and individuals to recover the cost of certain property over time. It applies to tangible property used in a trade or business or held for the production of income, such as buildings, machinery, vehicles, and equipment.
What Is Depreciable Property?
- Property must be used in a business or for income production.
- It must have a useful life longer than one year.
- Examples include office furniture, computers, vehicles, and buildings.
General Depreciation System (GDS)
The General Depreciation System (GDS) is the most commonly used method for depreciating property. It uses the 200% declining balance method, switching to straight-line in later years. The half-year convention applies, meaning you claim half of the first year’s depreciation in the year the property is placed in service.
Recovery periods vary by asset type:
- 3-year property: 33.33% in year 1, 44.45% in year 2, 14.81% in year 3, 7.41% in year 4
- 5-year property: 20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in year 4, 11.52% in year 5, 5.76% in year 6
- 7-year property: 14.29% in year 1, 24.49% in year 2, 17.49% in year 3, 12.49% in year 4, 8.93% in year 5, 8.92% in year 6, 8.93% in year 7
Reporting Depreciation
Depreciation is reported on Form 4562, Depreciation and Amortization. This form is attached to your federal tax return (Form 1040) if you are claiming depreciation deductions.
For more detailed guidance on how to calculate and report depreciation, refer to IRS publications and forms.
Additional Resources
- Publication 946: Provides comprehensive guidance on how to depreciate property and includes information on recordkeeping for businesses.
- Publication 551: Covers the basis of assets, which is essential for determining depreciation amounts.
- Publication 463: Includes information on travel, gift, and car expenses, which may relate to business use of vehicles.
Source:
Publication 551 - Basis of Assets
Form 4562 - Depreciation and Amortization
Publication 946 - How To Depreciate Property
Disclaimer: Always verify details with official Federal or State Department of Revenue Forms and Instructions.