You generally can't deduct in one year the entire cost of property you acquired, produced, or improved and placed in service for use either in your trade or business or to produce income if the property is a capital expenditure. Instead, you generally must depreciate such property. Depreciation is the recovery of the cost of the property over a number of years. You deduct a part of the cost every year until you fully recover its cost.
You may be able to elect under Section 179 to recover all or part of the cost of qualifying property up to certain dollar limits and thresholds based on property cost. You deduct Section 179 expense in the year you place the qualifying property in service. For property placed in service in tax years beginning after 2017, you may elect to treat qualified real property as qualifying property under Section 179. Qualified real property is qualified improvement property described in Section 168(e)(6), and is any of the following improvements that are made to nonresidential real property and placed in service after the date such nonresidential real property was first placed in service: roofs; heating, ventilation and air-conditioning property; fire protection and alarm systems; and security systems.
You may also be able to take a special depreciation allowance of 100 percent for certain new and used qualified property acquired after September 27, 2017, for the first year you place the property in service. This allowance is taken after any allowable Section 179 deduction and before any other depreciation is allowed.
There are also special rules and limits for depreciation of listed property, including automobiles. Computers and related peripheral equipment placed in service after 2017 are not included as listed property. For more information, refer to Publication 946, How to Depreciate Property.
Depreciable or Not Depreciable
The kinds of property that you can depreciate include machinery, equipment, buildings, vehicles, and furniture. You can't claim depreciation on property held for personal purposes. If you use property, such as a car, 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 certain land improvements may be.
You may depreciate property that meets all the following requirements:
- It must be property you own.
- It must be used in a business or income-producing activity.
- It must have a determinable useful life.
- It must be expected to last more than one year.
- It must not be excepted property. Excepted property (as described in Publication 946, How to Depreciate 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.
ACRS or MACRS
Generally, if you're depreciating property you placed in service before 1987, you must use the Accelerated Cost Recovery System (ACRS) or the same method you used in the past. For property placed in service after 1986, you generally must use the Modified Accelerated Cost Recovery System (MACRS).
- Publication 534, Depreciating Property Placed in Service Before 1987,
- Publication 527, Residential Rental Property (Including Rental of Vacation Homes),
- Publication 463, Travel, Entertainment, Gift, and Car Expenses,
- Publication 587, Business Use of Your Home (Including Use by Daycare Providers),
- Publication 225, Farmer's Tax Guide, and
- REG-104397-18 or 83 F.R. 39292, Additional First Year Depreciation Deduction.