You generally cannot deduct in one year the entire cost of property you acquired, produced, or improved and placed in service for use either in your trade or business or to produce income if the property is a capital expenditure. Instead, you generally must depreciate such property. You can use the straight-line depreciation or double-declining balance method. Once a business chooses a depreciation method for an asset, the business must generally use the same method for the life of the asset. Depreciation is the recovery of the cost of the property over several years. The property ceases to be depreciable when the business has fully recovered its cost or when it sells or retires the property from service, whichever happens first.
Depreciable or Not Depreciable
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, you can depreciate only the business or investment use portion. Land is never depreciable, although buildings and certain land improvements may be.
You may depreciate property that meets all the following requirements:
It must be property you own.
It must be used in a business or 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.
Certain property cannot be depreciated, including:
Raw land (although land improvements, such as fences, landscaping, bridges, and roads, can be depreciated).
Property placed in service and disposed of in the same year, or property with a useful life of one year or less.
Property used only for personal use.
Equipment that is used to build capital improvements.
Inventory or any other property held for sale for customers.
Section 197 intangibles such as copyrights, patents, franchises, non-compete agreements, and goodwill. There intangible assets must be amortized, not depreciated.
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