Depreciation & recapture

You may be able to deduct the acquisition cost of a computer purchased for business use in several ways:

• Under Internal Revenue Code section 179, you can expense the acquisition cost of the computer if the computer is qualifying property under section 179, by electing to recover all or part of the cost up to a dollar limit, by deducting the cost in the year you place the computer in service. If there's any remaining cost, you can either depreciate it with a special depreciation allowance in the year you place the computer in service if the computer is qualified property or you can depreciate any remaining cost over a 5-year recovery period.
• The special depreciation allowance is 80% for certain qualified property acquired after September 27, 2017, and placed in service after December 31, 2022, and before January 1, 2024.
• Alternatively, you can depreciate the acquisition cost over a 5-year recovery period in the year you place the computer in service, if you don't elect to expense any of the cost under section 179, the computer isn't eligible for the 100% special depreciation allowance in the year you place the computer in service, or you decide to elect out of any special depreciation allowance for the class of property that includes computers.
• You can never deduct more than the acquisition cost.

Note: For taxable years beginning in 2023, a taxpayer may expense up to $1,160,000 (the dollar limit) of the cost of the section 179 property placed in service during that taxable year. The $1,160,000 dollar limit amount is reduced by the amount by which the cost of the section 179 property placed in service during the taxable year exceeds $2,890,000.

• Publication 946, How to Depreciate Property
• IRB 2020-48 (See Revenue Procedure 2020-50)

Many taxpayers find using the standard mileage rate an easier way to expense their vehicle. You can't depreciate the vehicle if you use the standard mileage rate. Instead of the standard mileage rate, you can use the actual expense method. If you use this method, you need to figure depreciation for the vehicle.

You can claim business use of an automobile on:

• Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship), if you're a sole proprietor. You may also need to use Form 4562, Depreciation and Amortization. If a farmer, use Schedule F (Form 1040), Profit or Loss From Farming and Form 4562.

• Form 2106, Employee Business Expenses, if you’re an Armed Forces reservist, state or local government official paid on a fee basis, or a qualified performing artist.

• Publication 463, Travel, Entertainment, Gift, and Car Expenses
• Publication 544, Sales and Other Dispositions of Assets
• Publication 946, How to Depreciate Property

Regular Method - No. All allowed or allowable depreciation must be considered at the time of sale. You can generally figure depreciation on the business use portion of your home up to the gross income limitation, over a 39-year recovery period and using the mid-month convention. As long as you determine actual expenses and the correct amount of allowed or allowable depreciation, the depreciation reduces the basis of your home accordingly, whether or not you actually claim it on your tax return. Simplified Method - There's a simpler option where qualifying taxpayers may use a prescribed rate ($5 per square foot limited to 300 square feet) to compute the business-use-of-the-home deduction. This option, used instead of determining actual expenses, has the advantage of reducing your recordkeeping burden. Under this option, depreciation is treated as zero and the basis of your home won’t be reduced. For more information, visit Simplified Option for Home Office Deduction and FAQs – Simplified Method for Home Office Deduction. In addition, under this optional method, you can still deduct business expenses unrelated to qualified business use of the home for that taxable year, such as advertising, wages and supplies.

• Publication 946, How to Depreciate Property
• Publication 587, Business Use of Your Home (Including Use by Daycare Providers)
• Publication 544, Sales and Other Dispositions of Assets

Replacements of the entire roof and all the gutters, and all windows and doors of your residential rental property:

• Are generally restorations to your building property because they're replacements of major components or substantial structural parts of the building structure. As a result, these replacements are capital improvements to the residential rental property.
• Are a separate asset with a new placed-in-service date and are in the same class of property as the residential rental property to which they're attached.
• Are generally depreciated over a recovery period of 27.5 years using the straight line method of depreciation and a mid-month convention as residential rental property.

Repainting the exterior of your residential rental property:

• By itself, the cost of painting the exterior of a building is generally a currently deductible repair expense because merely painting isn't an improvement under the capitalization rules.
• However, if the painting directly benefits or is incurred as part of a larger project that's a capital improvement to the building structure, then the cost of the painting is considered part of the capital improvement and is subject to capitalization.
• In this case, the painting is incurred as part of the overall restoration of the building structure. Therefore, the repainting costs are part of the capital improvements and should be capitalized and depreciated as the same class of property that was restored, as discussed above.

Replacement of the furnace in your residential rental property:

• Is generally a restoration to your building property because it's for the replacement of a major component or substantial structural part of the building's HVAC system. Therefore, the furnace replacement is a capital improvement to your residential rental property.
• As with the restoration costs discussed above, these costs are a separate asset with a new placed-in-service date and are in the same class of property as the residential rental property to which the furnace is attached.
• Is generally depreciated over a recovery period of 27.5 years using the straight line method of depreciation and a mid-month convention as residential rental property.

Note: A taxpayer whose average annual gross receipts is less than or equal to $10,000,000 may elect to not capitalize amounts paid for repairs, maintenance, or improvements of certain eligible building property if the total amounts paid during the taxable year for such activities don't exceed certain dollar limitations. For more information, see Safe Harbor Election for Small Taxpayers in Tangible Property Regulations - Frequently Asked Questions.

• Publication 527, Residential Rental Property (Including Rental of Vacation Homes)
• Publication 946, How to Depreciate Property