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 requirements.

• It must be used in business or held to produce income.
• 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 year.
• Inventory (explained in chapter 6).
• Land.
• 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 Schedule C-EZ.

Depreciation method. 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. It explains what costs you can and cannot deduct, how to figure the deduction, and when to recapture the deduction.

Listed property. 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 equipment).

You must follow additional rules and recordkeeping requirements when depreciating listed property. For more information about listed property, see Publication 946.

Form 4562. 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 year.
• 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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