As a Business, What Property Can Be Depreciated?
As tax season approaches each year, business owners must consider the different legal tax liability reduction strategies available to them. While tax laws change frequently, one of the deductions that business owners have been able to claim consistently is for the depreciation of property.
To maximize your business tax deductions, while at the same time ensuring that the depreciation you claim is legal, consider the following:
What is depreciation?
Before you can claim the depreciation of property as a business-related expense, you must first understand what depreciation means and how it applies to your unique tax situation. Depreciation is defined as a reduction in the value of assets due to wear and tear over the passage of time. There are different ways to calculate depreciation based on the type of asset with which you are working.
Claiming property depreciation
In order to claim property depreciation as a deduction on your taxes, the IRS requires you to meet the following criteria:
- The property must be used to produce income or as part of your business.
- The property must be owned by you, even if you do not own the property outright (such as mortgaged property).
- There must be a determinable useful life of the property and it must be expected to last more than one year.
Most "tangible property" that meets the aforementioned criteria is eligible for this deduction. This includes any buildings, vehicles, equipment, furniture, and machinery. Additionally, most "intangible property" that depreciates in value over time -- such as computer software, patents, and copyrights -- will likely qualify for this deduction. It is important to note, however, that land is not tax-deductible as depreciated property.
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Depreciation of rented or leased property
If you own your property outright or have legal ownership and liability until a mortgage or other debt is paid off, depreciation may be fairly obvious. That being said, there are other situations in which renting or leasing property that you own makes handling depreciation a bit more tricky. For example, if you lease property that you own to someone else, you are entitled to claim any depreciation even if the lessee agreed to maintain the property. If, however the actual lease states that the property must be returned to you at the end of the lease in the same condition (with the same value) as when the lease began, you cannot claim depreciation.
Special circumstances for property depreciation
As with many other areas of tax law, the depreciation of property for tax purposes is not always black and white. There are areas in which, due to the complexity of the law or situation, a professional tax advisor will be best able to guide you through the process. It is important to understand exactly which types of property and in what ways depreciation is allowable in order to ensure that you are receiving the best business tax breaks possible without breaking any laws. To find answers to basic questions regarding business property and depreciation as a tax deduction, refer to IRS Publication 946.
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