Broker Check

When Business Property Must Be Depreciated

Whenever property is purchased for use in a business and that property has a useful life of more than one year, its cost must be deducted over its useful life. This accounting procedure is referred to as depreciation. The number of years the property must be depreciated is largely dependent upon the type of property it is, although sometimes the type of business in which it is used also determines its assigned life. However, there are exceptions to the depreciation requirement:

Sec 179 Expensing - The tax code contains a special provision that allows certain types of property to be expensed (deducted in year of purchase) rather than being depreciated. This provision is commonly referred to as Section 179 expensing and is limited to a maximum annual amount.  However, the Section 179 deduction only applies to tangible personal property such as tools, office equipment, machinery, etcThere are some other restrictions as well, so be sure to contact this office for additional details.

The annual Sec. 179 expense deduction cap for years 2010 through 2013 is $500,000. This cap is further reduced dollar for dollar for investments in qualifying Sec 179 property in excess of $2 million. Without further Congressional action the cap will drop to $25,000 with an investment limit of $200,000 in 2014.

Caution: The Sec 179 deduction is limited to the taxable income from any active trade or business of the taxpayer(s) including wages.

Off-the-Shelf Computer Software – Off-the-shelf computer software placed in service 2003 through 2013 is property eligible for Sec 179 expensing.

Certain Real Property Can Also Be Expensed – Certain real property is also eligible for Sec 179 expensing. For property placed in service in any tax year beginning in 2010 through 2013, the up-to-$500,000 deduction of property expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).

Example: A small business owner with a retail clothing store could expense under Sec 179 improvements that were made in 2010 through 2013 inside the store, such as built-in cabinets to better stock clothing or lights to brighten the fitting rooms. Allowing a retail store owner to expense these improvements immediately lowers the owner's cost.

Example – Business taxpayer places in service, in 2013, $100,000 of equipment eligible for Sec 179 expensing and $350,000 of qualifying leasehold improvements.  Assuming there is no income limitation the maximum Sec 179 deduction that the taxpayer can claim for 2013 is $350,000 ($100,000 for the equipment and $250,000 for the qualifying leasehold improvements).  

Bonus Depreciation – For qualifying assets purchased and placed in service in 2012 and 2013, trades or businesses are allowed to depreciate an additional 50% of the cost of the assets. The bonus allowance does not apply to real estate.

Deducting the Cost of Business Assets- Most business assets are depreciated over a specified life. For some assets, the depreciation is straight-line, while for others accelerated methods that front load the deduction may be used. Following are examples of the depreciable life for some commonly encountered business assets. Assets that are used only partially for business must be prorated for business use.

Agricultural Equipment 7 Yrs
Automobiles (1) 5 Yrs
Commercial Real Estate 39 Yrs
Land Not Depreciable
Land Improvements 15 Yrs
Office Equipment 5 Yrs
Office Furnishings 7 Yrs
Residential Real Estate 27.5 Yrs
Trucks 5 Yrs

(1) Vehicles under 6,000 lbs. gross unladen weight have additional deduction restrictions.