If property you acquire to use in your business is expected to last
more than one year, you generally cannot deduct the entire cost as a
business expense in the year you acquire it. You must spread the cost
over more than one tax year and deduct part of it each year on
Schedule C or C-EZ. This method of deducting the cost of
business property is called depreciation.
The discussion here is brief. You will find more information about
depreciation in Publication 946,
How To Depreciate Property.
What can be depreciated.
You can depreciate property if it meets all the following
- It must be used in business or held to produce
- It must be expected to last more than one year. In other
words, it must have a useful life that extends substantially beyond
the year it is placed in service.
- It must be something that wears out, decays, gets used up,
becomes obsolete, or loses its value from natural causes.
What cannot be depreciated.
You cannot depreciate any of the following items.
- Property placed in service and disposed of in the same
- Inventory (explained in chapter 6).
- Repairs and replacements that do not increase the value of
your property, make it more useful, or lengthen its useful life. You
can deduct these amounts on line 21 of Schedule C or line 2 of
The method for depreciating most tangible property placed in
service after 1986 is called the Modified Accelerated Cost Recovery
System (MACRS). (Tangible property is property you can see or touch.)
MACRS is discussed in detail in Publication 946.
Section 179 deduction.
You can choose to deduct a limited amount (for 2000, up to $20,000)
of the cost of certain depreciable property in the year you buy it for
use in your business. This deduction is known as the "section 179
deduction." For more information, see Publication 946.
what costs you can and cannot deduct, how to figure the deduction, and
when to recapture the deduction.
Listed property is any of the following.
- Most passenger automobiles.
- Most other property used for transportation.
- Any property of a type generally used for entertainment,
recreation, or amusement.
- Certain computer and related peripheral equipment.
- Any cellular telephone (or similar telecommunications
You must follow additional rules and recordkeeping requirements
when depreciating listed property. For more information about listed
property, see Publication 946.
Use Form 4562, Depreciation and Amortization, to report
depreciation and the section 179 deduction. Use it if you are claiming
any of the following.
- Depreciation on property placed in service during the tax
- A section 179 deduction.
- Depreciation on any listed property (regardless of when it
was placed in service).
If you have to use Form 4562, you must file Schedule C. You cannot
use Schedule C-EZ.
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