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Small business owner? Here’s what to know about the depreciation of property deduction

Posted on December 10, 2021

Our small business CPAs do a lot of specialized work with small businesses around state and federal taxes. Depreciation is one of the areas where we can help a small business better understand and take advantage of all the tax laws available to them.

First, what depreciation is all about:

  • Depreciation is an annual tax deduction that allows small businesses to recover the cost or other basis of certain property over the time they use the property.
  • It is an allowance for the wear and tear, deterioration or obsolescence of the property.
  • A small business can depreciate property when they place it in service for use in their trade or business or to produce income.
  • The business stops depreciating property when they have fully recovered their cost orother basis or when they retire it from service; whichever happens first.

What property is depreciable?

  • A small business can depreciate machinery, equipment, buildings, vehicles, and furniture.
  • It cannot claim depreciation on property used for personal purposes.
  • If a business uses an asset (such as a car), for business or investment and personal purposes, the business owner can depreciate only the business or investment use portion.
  • Land is never depreciable, although buildings and certain land improvements may be.

Businesses may depreciate property that meets all these requirements. The business must:

  • Own the property. The business is considered to own property even if it is subject to a debt.
  • Use the property in a business or income-producing activity. If the property is used to produce income, the income must be taxable. Property that’s used solely for personal activities can’t be depreciated.
  • Be able to assign a determinable useful life to the property. This means that it must be something that wears out, decays, gets used up, becomes obsolete or loses its value from natural causes.
  • Expect the property to last more than one year. It must have a useful life that extends substantially beyond the year a business places it in service.
  • Not depreciate excepted property. Excepted property includes certain intangible property, certain term interests, equipment used to build capital improvements, and property placed in service and disposed of in the same year.

Our experienced Teipen CPA Group small business team can help your business ascertain your tax deduction for depreciation this year, and for the years to come. Let’s talk small business taxes.