Tools That Need to Be Depreciated
The Internal Revenue Service allows working taxpayers to deduct the expense of tools used in business or equipment necessary to carry out the worker's job duties. The definition of qualifying tools varies with the type of business, the employee's work assignments, and the initial expense of the tool. The IRS also allows deductions for yearly maintenance for work tools to keep the items operational and performing safely.
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Depreciation
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"Depreciation," according to FindLaw, describes the decline in value of an item over a period of time. When an accountant depreciates a tool, the full payment for the item is divided over the ordinary life of the tool, including the time the tool is used in business through ordinary repair or maintenance. Each year, after the tool purchase, the bookkeeper takes a tax deduction for the tool based on the percentage of the value during the year the tool was put into service. This fixed period of use, the "useful life of the property," is called a straight-line depreciation system.
Equipment Expensing Deductions
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The Internal Revenue Service allows two types of tax deductions for work tools. The first allows a full deduction in the same year the worker purchased the tool. Taxpayers have the option of deducting the total cost of tools worn and useless after a year of service. The second tax write-off requires the worker to depreciate the value of the item over a number of years for tools still useful after the initial year when put into service. While the tax program allows the full depreciation of the cost of the item, the deduction requires a number of years. Taxpayers have the option of deducting the total cost of work clothes worn out after a year of wear, for instance, but typically must depreciate a hardhat used for work over the course of several years.
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Modified Accelerated Cost Recovery System
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The Modified Accelerated Cost Recovery System (MACRS), passed under the IRS codes to regulate depreciation for business property placed in service after 1986, allows the worker to depreciate the cost of the item over a period of time, depending on the type of item. Work tools, including taxi cabs, buses, trucks, computers, paper copiers, calculators, and dairy cattle used on working farms, use a five-year depreciation scale. The seven-year rule for depreciation applies for office furniture and business fixtures purchased for the structure to conduct business, including necessary lighting and lamps. The three-year rule applies to truck tractor-trailer rigs and farm horses. The 10-year depreciation rule applies to equipment purchased for business use, including vines and trees for use on farms growing fruit and nuts.
Deduction Limitations
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The Internal Revenue Service places limitations on tool deductions and depreciation. The tools must provide a necessary role in "carrying on your trade or business of being an employee" or carrying out work at your company if self employed. The tools must also be ordinary and necessary in your field of work to qualify for deduction or depreciation on federal income taxes.
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References
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