What is "Depreciation"?

You generally CANNOT* deduct, in one year, the entire cost of property you purchased, either to use in your trade or business or to produce income, if the property has a useful life substantially beyond the tax year. Instead, you can depreciate it. That is, you can spread the cost over a number of years, and deduct a part of the cost each year.

The kinds of property that you can depreciate include machinery, equipment, buildings, vehicles, and furniture. You CANNOT claim depreciation on property held for personal purposes. If you use property, such as a car, for both business and personal purposes, only the business use portion may be depreciated.

You may depreciate property if it meets ALL of the following three tests:

• It must be used in business or other income-producing activity,

• It must be something that wears out, decays, gets used up, becomes obsolete, or loses value from natural causes; and

• It must have a determinable useful life substantially beyond the tax year.

*Certain assets may be EXPENSED in the current year, if you make the election under Internal Revenue Code Section 179.

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