What Percent Should You Use to Depreciate Furniture?
Taxpayers and businesses can recover part of the costs of property that they use in the production of income. You cannot depreciate the costs of purchasing or installing personal furniture, but you can claim a depreciation or Section 179 deduction for office furniture, or home office furniture in some cases. To determine the percentage, without using IRS tables, you must first know the property class, the basis and the amount you anticipate recovering upon disposing of the furniture.
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Property Class
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With furniture, you'll usually employ the General Depreciation System to depreciate the property. Office furniture and fixtures classify as 7-year property under this system. Furniture that you use to generate income from residential real estate classifies as 5-year property. These property classes correspond to the useful life, or recovery period, of the furniture. Use the classes to determine how much to depreciate the property for each year of its useful life. For example, the total adjusted basis of the property minus any amount you think you'll recover upon disposal is taken as a deduction over the course of the 7-year period. Adjusted basis is the cost of the furniture plus any costs to move it to your office or install it. If you choose to sell the furniture at the end of seven years and anticipate receiving $500, this is the amount you recover upon disposal. (See Reference 1, Ch. 4, "Which Property Class Applies Under GDS?")
Depreciation Method
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The declining balance rate for both 5- and 7-year property is 200 percent. This is the amount you'll use beginning in the second year to determine the percentage of depreciation. In the first and last years, it's slightly different because you can only claim a proportional amount of depreciation depending on when you placed the furniture into service. You calculate this amount by determining the applicable convention. During years two through six (or two through four, with 5-year property) you divide 200 percent by the number of years remaining in the recovery period to determine the applicable percentage. For example, if your furniture is 7-year property and you're in year three, you divide 200 percent by four, which returns a value of 50 percent. Multiply this percentage by the amount of basis remaining. This is the amount you've not yet depreciated.
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Convention
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To determine the applicable percentage for depreciation of your furniture in the first and last years, you must determine whether the IRS requires you to use the mid-quarter or half-year conventions. If the value of all of the bases of the property you placed into service in the last three months of the tax year exceeds 40 percent of the total bases of all property placed into service during the entire year, use the mid-quarter convention. This means you treat all property as if you placed it into service at the halfway point of the quarter it was actually put into service. Otherwise, use the half-year convention, treating all property as having been placed into service at the halfway point of the tax year. If you use the half-year convention, then you depreciate exactly half of the amount for that year. For 7-year property, this means you multiply the depreciation for the first full year by 50 percent. If you use the mid-quarter convention, the percentage depends on the applicable quarter. If you place the furniture in service in the third quarter and it's 7-year property, then you multiply the first full year's depreciation amount by 37.5 percent.
Section 179 Deduction
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The IRS permits you to claim a Section 179 deduction for furniture, enabling you to deduct up to the full cost of the property in the year you place it into service. In general, you cannot deduct more than $500,000, or the total income your business earns in one year, whichever is greater. If the furniture is partially used for personal reasons and partially used for business purposes, you can only deduct the amount proportional to its business use. For example, if the furniture is in your home office and you expect to use it approximately 60 percent of the time for your business, you can deduct up to 60 percent of your total adjusted basis in the first year when using this election.
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