General Rules for Depreciation

Depreciable Property

Depreciation is a deduction allowed for certain property used in your business. It is designed to offset the cost of acquiring it, so you cannot depreciate leased property. To be depreciable, the property must be the kind that wears out, decays, gets used up, becomes obsolete, or loses value from natural causes. The property must have a determinable useful life that is longer than 1 year.

In 2012, you begin to use a personal computer for a business you have just started up. You paid $2,500 for it in 2010 and it is now worth $1,200. Your basis for depreciation is $1,200. At the same time, you begin to use 1 room in your home as a home office. You bought your home in 2004 for $200,000 and it is now worth $300,000 (exclusive of land). Assuming that the home office allocation is 12.5% of the home, your basis for depreciation is $25,000 (12.5% of $200,000, which is lower than 12.5% of $300,000, or $37,500).

If you convert personal property to business use (explained later in this chapter), the basis for purposes of depreciation is the lower of its adjusted basis (generally cost) or fair market value at the time of the conversion to business use. If you acquire replacement property in a like-kind exchange or an involuntary conversion, special rules govern basis for purposes of depreciation (see IRS Publication 946, How to Depreciate Property).

Property that can be expected to last for 1 year or less is simply deducted ...

Get J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.