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What Can and Cannot Be Depreciated

Depreciable Property
Let’s start with what the IRS considers depreciable property:

It must be owned by you or your business. But there’s also an

exception: If you don’t own a property but make capital
improvements to it, you can still depreciate the value of the
improvements.
You must make use of this property for your business or in an
income-producing activity. If you also use the asset for personal
use (say you have a home business), you can only depreciate
that portion of the asset dedicated to business use.
It must have a “determinable useful life” that is greater than one
year.

In other words, what’s generally depreciable is income-producing

property that you own and make use of for more than a year that
typically will wear out or decline in value over time.

Depreciable property includes machines, vehicles, office buildings,

buildings you rent out for income (both residential and commercial
property), and other equipment, including computers and other
technology. In the case of property that you’re renting, you’re
considered as “owning” the improvements you’ve made on it and
eligible to depreciate them, so long as these are enjoyed for longer
than one year. Depreciable property can be either tangible like the
assets mentioned above, or intangible – patents, copyrights,
computer software, and the like.

What Can’t You Depreciate?

What can’t you depreciate? As discussed in the Quick Summary, you
can’t depreciate property for personal use, inventory, or assets held
for investment purposes. You can’t depreciate assets that don’t lose
their value over time – or that you’re not currently making use of to
produce income. These include:

Land
Collectibles like art, coins, or memorabilia
Investments like stocks and bonds
Buildings that you aren’t actively renting for income
Personal property, which includes clothing, and your personal
residence and car
Any property placed in service and used for less than one year

Don’t forget, in terms of depreciation, that your cost basis of an

asset should include not only the purchase price, but also additional
costs like sales taxes, freight charges, and any installation and
testing fees.

And finally, if you improve depreciable property, that improvement,

at least for tax purposes, should be treated as a separate
depreciable property. This would occur if you make an addition or
partial replacement to a property that adds to its value. If, on the
other hand, you’re just repairing a property, you can typically deduct
this as a business expense.

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For more information on what can and cannot be
depreciated, you should go straight to the source: The
IRS’s Publication 946 PDF, How To Depreciate Property.
As discussed in a recent SBA publication, A Tax Policy
Update for America's Small Businesses, expensing rules
for small businesses have been in flux in recent years.
Following the recession, federal policymakers changed
depreciation rules in an attempt to stimulate the
economy. Now some of these rulings are in retreat.
Whether you or a professional tackles your taxes and/or
your books, it’s important to stay on top of these
changes.
One such rule, in effect from 2010 to 2013, allowed
business owners to expense certain types of property in
the first year of its useful life (Section 179 of the tax
code) – up to a limit of $500,000. That limit, beginning in
the 2014 tax year, returned to $25,000. For 2018,
changes to depreciation will take place, particularly
to bonus depreciation. This change will allow businesses
to deduct 100% of the cost of eligible property in the
year it’s placed in service. For more information on
changes to Section 168 and Section 179 refer to your tax
preparer. They are probably your best resource.

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