You generally cannot deduct, in one year, the entire cost of property you
purchased, either for use in your trade or business or to produce income,
if the property has a useful life substantially beyond the tax year. Instead,
you can depreciate it. That is, you can spread the cost over a number of years,
and deduct a part of the cost each year.
The kinds of property that you can depreciate include machinery, equipment,
buildings, vehicles, and furniture. You cannot claim depreciation on property
held for personal purposes. If you use property, such as a car, for both business
or investment and personal purposes, only the business or investment use portion
may be depreciated. You may depreciate property that meets all five of the
following tests.
It must be property you own.
It must be used in a business or other income–producing activity.
It must have a determinable useful life.
It must be expected to last more than one year.
It must not be excepted property. Excepted property (as described in Publication
946, How to Depreciate Property) includes certain intangible
property, certain term interests, and property placed in service and disposed
of in the same year.
Generally, if you are depreciating property you placed in service before
1987, you must use the Accelerated Cost Recovery System (ACRS) or the same
method you used in the past. For property placed in service after 1986, you
generally must use the Modified Accelerated Cost Recovery System (MACRS).
If you meet eligibility requirements, you can choose to expense rather
than depreciate part or all of the cost of the property. The maximum amount
that may be expensed for 2004 is generally $102,000. This deduction is known
as the "Section 179 deduction."
If you depreciate part or all of the cost of the property, you may be able
to claim an additional first–year 30% depreciation allowance for qualified
property acquired after September 10, 2001 (or an additional first–year
50% depreciation allowance for 50–percent bonus depreciation property
acquired after May 5, 2003).
For more information, refer to Publication 946, How to Depreciate
Property, or Publication 534(PDF), Depreciating Property
Placed in Service Before 1987. You can also find information on depreciation
in Publication 527, Residential Rental Property (Including Rental
of Vacation Homes), Publication 463, Travel, Entertainment, Gift,
and Car Expenses, Publication 587, Business Use of Your Home,
and Publication 225, Farmer's Tax Guide.
