What’s the depreciation schedule for business assets?

If you own a business, you can deduct purchases used to make income for your business over time. This includes business assets like equipment and property. To do this, you’ll need to determine the depreciation schedule for the asset. 

First, you’ll need to choose the category of the property. Usually, you can break down business assets into categories based on the set amount of years in which you can depreciate the assets. 

The three most common categories are:

• Three-year property – certain livestock, manufacturing tools, and over-the-road tractor units 
• Five-year property – office equipment, computers, vehicles, and construction assets 
• Seven-year property – appliances, office furniture, and property that hasn’t been categorized 

You can also depreciate real property if you use it in a trade or business or if it creates income for you. For residential rental property, the depreciable life is 27.5 years. For commercial rental real estate and buildings used in a trade or business, the depreciable life is 39 years. Keep in mind that land itself isn’t depreciable. However, you can still depreciate buildings and other improvements to the land.

Once you’ve found the category of each business asset, you then must choose a depreciation schedule. There are two types of depreciation schedules: time-based and usage-based. 

Time-based depreciation schedules under the Modified Accelerated Cost Recovery System (MACRS) include:

• The straight line (SL) method, which spreads expenses evenly across an asset’s depreciable life.
• The declining balance (DB) method, that changes in amount each year. These are:
  • The 200% declining balance method, also called the double declining balance method (DDB)
  • The 150% declining balance (DB) method

You can calculate the depreciation expense for a business asset every year. To do this, multiply its depreciable cost by a table-given percentage for the year (Year 1, Year 2, etc.) 

A usage-based depreciation schedule is an alternative schedule for business assets. With this schedule, the depreciation expense for each year reflects the asset’s usage. Ex: For a car used for business purposes, you can use the total miles driven to determine the deduction. 

Assets you’re placing in service this year might also be eligible for bonus depreciation or the Section 179 deduction. Get familiar with Form 4562 to better understand the uses of depreciation and amortization, what qualifies for bonus depreciation, and which sections will be relevant to your expenses for taxes this year.

How to determine if you can use business asset depreciation

If you expect an item to last more than one year, you must depreciate it. You can’t deduct it in the year you buy it. To depreciate an item, all of these must be true:

• You must own it.
• You must use it for business or to create income.
• It must wear out, decay, get used up, become out-of-date, or lose its value from natural causes. In other words, its useful life must have an end. Ex: A tractor’s useful life has an end. However, land is useful for a long time, so it isn’t a depreciable asset.

Depreciation for a business asset begins when you start using an item. It ends when it’s fully depreciated, or you stop using or get rid of the item.

You can’t depreciate an item you got rid of in the same year you started using it.

You might also be able to deduct, rather than depreciate, small expenses using the safe harbor for de minimis amounts.

Finally, you also can’t depreciate repairs or improvements that don’t do any of these:

• Increase the value of your property
• Make the property more useful
• Lengthen the property’s useful life

Instead, you can expense these repairs.

Rely on our team of small business certified tax pros to get your taxes right and keep your business on track. Connect with us at blockadvisors.com.

Our small business tax professional certification is awarded by Block Advisors, a part of H&R Block, based upon successful completion of proprietary training. Our Block Advisors small business services are available at participating Block Advisors and H&R Block offices nationwide.

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Own your own business? Or are you self employed? Rely on our team of small business certified tax pros to get your taxes right and keep your business on track. Connect with us at blockadvisors.com.

Our small business tax professional certification is awarded by Block Advisors, a part of H&R Block, based upon successful completion of proprietary training. Our Block Advisors small business services are available at participating Block Advisors and H&R Block offices nationwide.