Assets, such as land, buildings, machinery and furniture, provide businesses with economic benefit over a time frame. For tax purposes, most, but not all, assets are eligible to be depreciated, or written off over time. This allows businesses to take a tax deduction for the asset cost over the time it is used. The Internal Revenue Code outlines specific criteria for which property may be depreciated.
First, property must be owned to be depreciation-eligible. Owned property is eligible even with outstanding debt on it. Normally, property leased by the business cannot be depreciated. If the business leases its property to someone else, however, the business can depreciate it if basic ownership rights are retained. These rights include property legal title, property financial obligation, property maintenance and taxes obligation, and bearing the property risk of loss if damaged or destroyed.
Assets eligible for depreciation must be used for business or income-producing purposes. Property with both personal and business use is depreciation-eligible based on the business use percentage only. Supporting records must be kept showing the business and personal usage amounts for these assets. Inventory cannot be depreciated because it is held for sale to customers in the ordinary course of business rather than being held for use in the business.
Specific Useful Life
Property eligible for depreciation must have a reasonably determinable useful life, which, at a minimum, must extend substantially beyond the year it is placed into service. A useful life is the time frame an asset is expected to wear out, get used up, become obsolete, or otherwise lose its value. Property with less than a year useful life cannot be depreciated, but can be deducted as a current business expense.
Land cannot be depreciated, since it has an unlimited useful life. Certain landscaping costs such as shrubbery may be depreciated, if closely tied to a depreciation-eligible asset with a useful life such as a building. Any asset placed into service and disposed of in the same year is also ineligible for depreciation. Equipment used to build capital improvements cannot be depreciated. Also, certain intangible assets cannot be depreciated, but can be amortized.