How Depreciation Could Affect Your Taxes

Any tax discussion will always mention the words depreciation and depreciate. What is depreciation in the first place? How does this concept affect your taxes?

A Quick Definition of Depreciation

Depreciation, in the most basic sense, has something to do with income tax deduction. As an IRS write-off, depreciation gives a taxpayer the chance to recover the price of specific property pieces. The purpose of depreciation is to be a yearly allowance for wear and tear, general obsolescence or deterioration of a particular piece of property because of the amount of usage that the property received over time.

Types of Depreciable Properties

Apart from land, majority of tangible properties of a specific function and value could be depreciated on the tax return within the duration of a few years.

The most common samples of tangible items that could experience depreciation include the following:

  • Vehicles such as cars, boats, and trucks
  • Buildings such as commercial office spaces, shopping centers, multifamily buildings, storage facilities.
  • Furniture such as bookcases and desks
  • Equipment such as iPads, computes, and medical devices
  • Machinery like 3D printers

Meanwhile, samples of intangible items that you can depreciate include:

  • Copyrights on materials
  • Patents on inventions
  • Obsolete computer software

Claiming a Depreciation Deduction

There are several requirements set by the IRS that you need to meet for you to become eligible for depreciation deduction on a particular piece of property:

  1. You must be the owner of the real estate you depreciate. But, you can also depreciate the capital improvements on your property.
  2. Depreciable property should have a determinable useful life of a minimum of 1 year.
  3. You have to make use of your depreciable property in one kind of income-generating activity like in a Retail center, Storage Facility  or Multifamily Building. If you are using the property for business and personal purposes alike, you will only be able to deduct the property’s depreciation for its business use alone.

Depreciation starts once a taxpayer places a piece of property in service to be used for business or any other form of income-earning interest. The property will not be depreciable anymore once the taxpayer has completely recovered the property’s cost or once the taxpayer retired it from its use, whichever happens first.

Remember that in general, the following forms of property cannot be depreciated:

  • Some term interests
  • Some equipment used for building capital improvements
  • Properties you use actively and dispose of within the same year

Being a taxpayer, you need to determine several items to make sure that the property will have a proper depreciation such as the following:

  • The exact class life of the at-hand asset
  • The depreciation method you want for the property
  • If you choose to expense any part of the asset
  • If this is deemed as listed property
  • The at-hand property’s depreciable basis
  • If you are qualified for bonus first-year depreciation

Being familiar with the concept of depreciation is important as this affects your taxes in more ways than one.


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