Depreciation

What is Depreciation?

When you buy a fscapital asset, you expect to use that item for several years. A capital asset is a piece of equipment, a building, or a vehicle for use in your business. The cost of these capital assets should be written off over the same period of time you expect them to earn income for you. Therefore, you must spread the cost over several tax years and deduct part of it each year as a business expense. As these assets wear out, lose value, or become obsolete, you recover your cost as a business expense. This method of deducting the cost of business property is called depreciation.

There are two types of property that can be depreciated:

Real Property - Buildings (real estate) or anything else built on or attached to land. Land can never be depreciated.
Personal Property - Cars, trucks, equipment, furniture, or almost anything that isn't real 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
• It must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes

What Cannot Be Depreciated?

• Property placed in service and disposed of in the same year
• Inventory
• Land
• Repairs and replacements that do not increase the value of your property, make it more useful, or lengthen its useful life

When Depreciation Begins and Ends

You begin to depreciate your property:

• When you place it in service for use in your trade or business
• When it is used for the production of income

You stop depreciating property either:

• When you have fully recovered your cost or other basis
• When you retire it from service, whichever happens first

For depreciation purposes, you place property in service when it is ready and available for a specific use, whether in a trade or business, the production of income, a tax-exempt activity, or a personal activity.

Example 1
You bought a home and used it as your personal home several years before you converted it to rental property. Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. You can claim a depreciation deduction in the year that you converted it to rental property because its use changed to an income-producing use at that time.

Example 2
You bought a planter for your farm business late in the year after harvest was over. You take a depreciation deduction for the planter for that year because it was ready and available for its specific use.

How To Claim Depreciation
In order to claim depreciation you must complete and attach Form 4562, Depreciation and Amortization to your tax return if you are claiming any of the following.

• A section 179 deduction for the current year or a section 179 carryover from a prior year
• Depreciation for property placed in service during the current year
• Depreciation on any vehicle or other listed property, regardless of when it was placed in service
• A deduction for any vehicle if the deduction is reported on a form other than Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business
• Amortization of costs that began in the current year
• Any depreciation on a corporate income tax return (other than Form 1120S, U.S. Income Tax Return for an S Corporation.)

Modified Accelerated Cost Recovery System (MACRS)
MACRS consists of two systems that determine how you depreciate your property. The main system is called the General Depreciation System (GDS) and the second system is called the Alternative Depreciation System (ADS).
You generally must use GDS to figure your depreciation deduction unless you are specifically required by law to use ADS or you elect to use it.

The method for depreciating most tangible property placed in service after 1986 is called the Modified Accelerated Cost Recovery System (MACRS). Note - Tangible property is property you can see or touch. The chart below will assist you in finding information that affects Gas Retailers.

For additional information on items not seen on this chart, refer to Publication 946, How to Depreciate Property (PDF).

* 31.5 years for buildings placed in service before May 13, 1993