Vrakas CPAs, Here Are Your Articles for Wednesday, May 11, 2022
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What Business Owners Need To Know About Depreciation


Depreciation is an annual tax deduction that allows small businesses to recover the costs of certain property that decreases in value over its lifetime. It's an allowance for the wear and tear, deterioration, or obsolescence of the property.

As a small-business owner, you can depreciate property when you place it in service for use in your trade or business or to produce income. You stop depreciating property when it has fully recovered its cost or when it's retired from service, whichever happens first.

What's depreciable? Machinery, equipment, buildings, vehicles, and furniture that are owned by the business are depreciable assets. You cannot claim depreciation on personal property. If you use an asset — a car, for instance — for both business or investment and personal purposes, you can depreciate only the business or investment use portion. Land is never depreciable, although buildings and some land improvements may be.

 To depreciate property, your business must:

  • Own the property. The business is considered to own property even if the property is subject to a debt.
  • Use the property in a business or income-producing activity. If your 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 your property. This means 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. The property must have a useful life that extends substantially beyond the year you placed 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.

Consider the methods

The IRS allows you to use different depreciation methods, depending on the type of property.

The modified accelerated cost recovery system (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. MACRS consists of two depreciation systems, the general depreciation system and the alternative depreciation system. Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions.

Sometimes, however, you will use the straight-line method, which lets you deduct the same amount of depreciation each year over the useful life of the property. There is also the forecast method, in which each year's depreciation deduction is equal to the cost of the property multiplied by a fraction. The fraction is the current year's net income from the property over the anticipated net income that the property will bring in 10 years after it is placed in service.

Work with a tax professional to decide which method is appropriate in your situation.

New for 2022

Recently, the IRS imposed new dollar limits on the section 179 deduction. For tax years beginning in 2022, the maximum section 179 expense deduction is $1,080,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2,700,000. Also, the maximum section 179 expense deduction for sport utility vehicles placed in service in tax years beginning in 2022 is $27,000.

This is just a brief introduction to a complex topic; there are many other provisions. Again, your best bet is to work closely with a qualified tax adviser to make sure you're following the rules and getting all the breaks you're entitled to.

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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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