In the United States, taxpayers may depreciate personal property in both residential and nonresidential rental real estate over estimated usable lives provided for under the Internal Revenue Code and administered by the Internal Revenue Service (IRS). This depreciable property includes portable air conditioning units, which may be eligible for accelerated depreciation deductions.
The Internal Revenue Code establishes class lives, or a period of years over which certain property may be depreciated, or the period of time the cost of depreciable property is recoverable through income tax deductions by the taxpayer. A portable air conditioning unit would qualify as a five-year class life property if used in residential rental real estate activity. For other nonresidential rental real estate activities, such as commercial or retail rentals, a portable air conditioning unit would qualify as a seven-year class life property. The cost of the air conditioning unit for rental property is therefore deductible over a five- or seven-year period using what the IRS refers to as the Modified Accelerated Cost Recovery System (MACRS), a system for determining the percentage of the property’s cost that can be deducted in each year.
The IRS requires that taxpayers use Form 4562, Depreciation and Amortization, to report the amount of depreciation deduction for personal property used in rental activities. Form 4562 requires taxpayers to report the class life of the property, the month and year the property was placed in service, the convention period used for the property, the depreciation method and a computation of the amount of depreciation deduction claimed. Form 4562 must be attached to the taxpayer’s individual income tax return, where the amount of the depreciation deduction is used to reduce income from rental real estate activities.
In computing the amount of depreciation to be reported on Form 4562, the IRS requires that taxpayers use a mid-month convention date to determine the amount of depreciation during the first year and last year a five-year or seven-year class life property is in service. A mid-month convention date indicates that the property placed in service during a specific month is deemed to be in service as of the midpoint of the month, For example, an air conditioner put in service on December 30 for a tax year ending December 31 would be deemed to be in service for one-half a month under the mid-month convention rules. The IRS publishes extensive charts and worksheets that allow taxpayers to determine the deductible percentage of depreciation for any period knowing the in-service date and the class life of the property.
Bonus Depreciation and Section 179 Deduction
Prior to computing any amounts of depreciation deduction, taxpayers are typically eligible to claim special, accelerated amounts of depreciation on personal property placed in service during a tax year. There are two types of these accelerated depreciation deductions -- known as bonus depreciation and Section 179 Depreciation. Air conditioning units are specifically excluded as ineligible for Section 179 Depreciation. Bonus depreciation, equal to 50 percent or 100 percent of the air conditioning unit’s value, may be claimed. The amount of deduction depends on the date in service and current tax rules. If the air conditioning unit qualifies for bonus depreciation, the appropriate 50 percent or 100 percent amount may deducted.