A depreciable type of property is a business asset with a lifespan. It’s an asset that is qualified as a business expense and may provide the company with tax benefits throughout the years. Check out the article to learn the definition of the depreciable property specified by the IRS. And what property to register as a depreciable asset.
What is Depreciable Property?
According to IRS, the depreciable property is a business asset that has the following characteristics:
- A business owns it.
- It has to be beneficial for business, meaning it generates profit.
- It has a limited lifespan during which the company uses the asset.
- It should last for at least a year.
In simple words, the value of certain assets decreases over years of active use by businesses. Depreciation is the method to determine this value decrease to reduce a company’s tax burden.
The asset should be terminable (but last more than a year) and used for the benefit of the business. Property (but not land), equipment and instruments, vehicles are depreciable.
In some cases, the intangible property will also fall into the depreciable category, for example, copyrights or patents. But IRS publication 535 recommends authorizing copyrights and patents instead of registering these assets as depreciable property.
What Assets are Depreciable?
The company starts depreciating property as soon as it’s placed into service. For example, buying and setting up a computer for employees to use means placing an asset into service. The value of this asset over time keeps decreasing because of regular use to bring profit.
That’s why if the asset is tangible, the company might register this property as depreciable to get tax benefits. Examples of depreciable property are as follows:
- manufacturing machinery;
- building actively rented out to generate profit.
Computers, copiers, scanners, production lines, etc., are all examples of depreciable assets. Note, you cannot use personal cars or buildings as depreciable assets since a business doesn’t own them. It’s also important to understand that only companies use the depreciation method. It’s not possible to claim depreciation on personal taxes.
What type of Assets can’t Be Depreciated?
Property that truly loses value could be depreciable. For example, a building might depreciate over time and lose its value, but not the land. Even though soil degradation happens over time, it doesn’t fall into the depreciation category.
A business can’t depreciate assets acquired in the same year. These assets are called current assets, and this category includes accounts receivable (owed to a company), office supplies, as pens, pencils, etc. But the copier machine is a depreciable asset.
A business also can’t depreciate artwork, investments (stock or bonds), buildings that a business doesn’t actively use to generate income. Personal property doesn’t fall under the depreciable category, as well as any asset that a company uses for less than a year.
Cash is not a depreciable asset. Even though such a process as inflation affects the value of money, cash can’t be depreciable property. A simple example to prove this fact is that $5 is always worth $5 even if overtime this bill can’t buy as much as it used to.
To sum up, assets that depreciate can be used to reduce a business’s tax burden. But first, the property has to fall into the category of depreciable assets. Depreciable property has a determinable life, but it should last more than a year. During this period, the business must use the asset to deliver services/products to clients. Personal property isn’t depreciable.
Author: Charles Lutwidge