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11.1 Sale or Trade of Business, Depreciation, Rentals: Depreciation & Recapture
Can the entire acquisition cost of a computer that I purchased for
my business be deducted as a business expense or do I have to use depreciation?
A deduction for depreciation of a computer for business use can be expensed
in the first year if qualified, or depreciated over the recovery period. To
claim the expense in the first year, the property must be used more than 50%
for business use, and meet the other requirements for expensing.
The 2003 Jobs and Growth Tax Relief Reconciliation Act of 2003 raised the
aggregate cost that can be expensed for any tax year after 2002 and before
2006 to $100,000. The new law also expanded the definition of Code Section
179 property to include off-the shelf computer software. See Code Section 179 for the expanded definition.
If you make a choice to depreciate the property you can claim a special
depreciation allowance for qualified property you acquired in service after
September 10, 2001 and before January 1, 2005. The allowance is a depreciation
deduction equal to 30% of the property's depreciable basis. The special depreciation
is figured before you calculate your regular depreciation. To qualify for
the special deduction the property must:
Be new property this is depreciated under MACRS with a recovery period
of 20 years or less.
Be property that was acquired after September 10, 2001 and before January
1, 2005.
Be property that was placed in service and before January 1, 2005.
Be property the original use of which began after September 10, 2001
See Publication 946, How to Depreciate Property for
additional information on the special deduction.
The 2003 Jobs and Growth Tax Relief Reconciliation Act of 2003 modified
the bonus depreciation rule by substituting a 50% special depreciation allowance
for the 30%, for property acquired after May 5, 2003 and before January 1,
2005. No binding contract for acquisition can be in effect before May 6, 2003.
Property eligible for the 50% additional first-year depreciation is not eligible
for the 30% additional first-year depreciation. However, an election can be
made to have the 30% additional first-year depreciation deduction apply to
the 50% depreciation property instead of the 50% additional firs-year depreciation
deduction. It is also possible to elect not to claim the additional first-year
depreciation.
References:
What kinds of property can be depreciated for tax purposes?
Only property used in a trade or business or in an income production activity
can be depreciated. Additionally, the property must be something that wears
out or becomes obsolete and it must have a determinable useful life substantially
beyond the tax year. The kinds of property that can be depreciated include,
but are not limited to, machinery, equipment, buildings, vehicles, and furniture.
Depreciation is a complex topic. For more information, refer to Tax Topic 704, Depreciation,
or Publication 946, How to Depreciate Property ,
or Publication 534 (PDF) , Depreciating Property
Placed in Service Before 1987.
References:
I purchased a computer last year to do online day trading part-time
from home for additional income. Can I deduct or depreciate the cost of the
computer or internet connection from my investment income?
You may deduct investment expenses (other than interest expenses) as miscellaneous
itemized deductions on Form 1040, Schedule A (PDF),
line 22, Itemized Deductions. This would include depreciation on
the portion of your computer used for investment purposes, and the portion
of your internet access charges used for investment purposes.
A deduction for depreciation of a computer for business use can be expensed
in the first year if qualified, or depreciated over the recovery period. To
claim the expense in the first year, the property must be used more than 50%
for business use, and meet the other requirements for expensing.
The 2003 Jobs and Growth Act raised the aggregate cost that can be expensed
for any tax year beginning after 2002 and before 2006 to $100,000. The new
law also expanded the definition of Code Section 179 property to include off-the-shelf
computer software. See Code Section 179 for the expanded definition. If the business use falls
to 50% or less in a later year, these tax benefits may be subject to recapture.
See Publication 946 , How to Depreciate Property for
additional information on the special deduction.
These deductions must be reduced by 2% of your adjusted gross income. Use Form 4562 (PDF), Depreciation and Amortization,
to compute the depreciation for the portion of your computer used for investment
purposes.
Note: Unless the computer is used more than 50% for business purpose (as
opposed to investment purposes), you cannot claim section 179 expensing of
the computer or claim accelerated depreciation for it. For more information,
refer to "Listed Property" in Publication 946, How to Depreciate Property.
References:
I purchased a computer to support my job-related activities. As
an employee, can I write-off the entire allowed cost or will I have to depreciate
it over a few years?
You can claim a depreciation deduction for a computer that you use in your
work as an employee if its use is:
For the convenience of your employer, and
Required as a condition of your employment.
Use Form 4562 (PDF) , Depreciation and
Amortization , to compute the depreciation. There have been recent changes
to the percentage of depreciation claimed in the first year you place the
property in service.
The cost of a computer purchased for business use can be expensed under
section 179 in the first year if qualified, or depreciated over the recovery
period. To claim the expense in the first year, the property must be used
more than 50% for business use, and meet the other requirements for expensing.
The 2003 Jobs and Growth Act raised the aggregate cost that can be expensed
for any tax year after 2002 and before 2006 to $100,000. The new law also
expanded the definition of Code Section 179 property to include off-the shelf computer software.
See Code Section 179 for the expanded definition.
If you make a choice to depreciate the property you can claim a special
depreciation allowance for qualified property you acquired after September
10, 2001 and before January 1, 2005. The allowance is figured before you calculate
your regular depreciation. See Publication 946 , How to
Depreciate Property for additional information on the special deduction.
You cannot take a section 179 deduction for the item or claim accelerated
depreciation unless your use of the computer is more than 50% business or
job-related use (and you meet the two conditions listed above).
Section 179 deductions and accelerated depreciation methods are explained
in Publication 946, How to Depreciate Property.
References:
I need to know the maximum deduction allowed for depreciation on
a passenger automobile purchased in 2003?
The maximum deduction (including any amounts deducted under section 179)
that can be claimed for a used passenger automobile or one that is Liberty
Zone property that was placed in service in 2003 is $3,060 for the first year,
$4,900 for the second year, $2,950 for the third year, and $1,775 for the
fourth and following years. For a new passenger automobile acquired on or
before May 5, 2003 (and not Liberty Zone property), the first year deduction
is limited to $7,660 (or $3,060 if the owner elects not to take the 30 percent
additional bonus depreciation allowance. The 2003 Jobs and Growth Tax Relief
and Reconciliation Act provided that for qualified vehicles purchased after
May 5, 2003, the first-year depreciation deduction is limited to $10,710 (or
$3,060 if the owner elects not to take either the 30% or the 50% bonus depreciation
allowance). Subsequent year limits are the same as for used vehicles. Some
what higher limits apply to owners of trucks and vans. For more information
refer to Publication 946, How to Depreciate Property and Publication 463, Travel, Entertainment, Gift, and Car Expenses
References:
What form and line do I deduct the 36 cents per mile on for my business
travel and do I need to figure depreciation of the vehicle, too?
A Sole Proprietor's business use of a car or truck is claimed on line 10
of Form 1040, Schedule C (PDF), Schedule C, Profit or
Loss from Business or, if eligible, line 2 of Form 1040, Schedule C-EZ (PDF), Net Profit from Business. You may use
either the actual expense method in calculating your car or truck expense
or, if eligible, the 2003 standard mileage rate of 36 cents per mile. Depreciation
expense is already included in this standard mileage rate. Depreciation is
only calculated as a separate expense when using the actual expense method.
Deductible employee business use of a car or truck may be taken on Form 2106 (PDF), Employee Business Expenses , or
if, eligible, line 1 of Form 2106-EZ (PDF), Unreimbursed
Employee Business Expenses. The car and truck expenses are then taken
with other employee business expenses on line 20, Form 1040, Schedule A&B (PDF) Itemized Deductions . For more information,
refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses ,
and Publication 535, Business Expenses .
References:
- Publication 535, Business Expenses
- Publication 463, Travel, Entertainment, Gift, and Car
Expenses
- Form 1040, Schedule C (PDF), Profit
or Loss from Business (Sole Proprietorship)
- Form 1040, Schedule C-EZ (PDF), Unreimbursed
Employee Business Expenses.
- Form 2106 (PDF), Employee Business
Expenses
- Form 2106EZ (PDF), Unreimbursed
Employee Business Expenses
I have a home office. Can I deduct expenses like mortgage, utilities,
etc., but not deduct depreciation so that when I sell this house, the basis
won't be affected?
If you have qualified business use of your home and enough gross income
from that business use to that entitle you to a depreciation deduction, you
are required to reduce your basis in the home by the amount of depreciation
allowed (deducted) or allowable (could have been deducted).
Whether you choose to deduct the depreciation on your current return(s)
will not matter. For tax purposes, you will still be treated as if you had
taken the allowable deduction, and your basis will have to be reduced. For
more information, refer to Publication 946, How to Depreciate Property, Publication 544, Sales and Other Dispositions of Assets, and Publication 587, Business Use of Your Home.
References:
I have a rental property. Do I have to take depreciation on it?
You do not have to claim depreciation on your rental property on your tax
return. However, when reporting the sale of the rental property you are required
to reduce the basis of the property for allowable depreciation regardless
of whether the depreciation deduction was taken or not. For more information,
refer to Publication 544, Sale or Other Dispositions of Assets,
the
Instructions for Form 4797, Sale of Business Property,
and Publication 527, Residential Rental Property (including
vacation homes).
References:
In calculating depreciation on both my rental apartment building
and its furniture, what depreciation type, asset class, depreciation method,
and recovery period should be used?
You can claim a special depreciation allowance for qualified property you
acquired after September 10, 2001 and before January 1, 2005. The allowance
is a depreciation deduction equal to 30% of the property's depreciable basis.
The special depreciation is figured before you calculate your regular depreciation.
To qualify for the special deduction the property must:
Be new property that is depreciated under MACRS with recovery period of
20 years or less.
Be property that was acquired after September 10, 2001 and before January
1, 2005.
Be property that was placed in service Before January 1, 2005.
Be property that the original use began after September 10, 2001.
See Publication 946, How to Depreciate Property for
additional information on the special deduction.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 modified the
bonus depreciation rule by substituting a 50% special depreciation allowance
for the 30%, for property acquired after May 5, 2003 and before January 1,
2005. No binding contract for acquisition can be in effect before May 6, 2003.
Property eligible for the 50% additional first-year depreciation is not eligible
for the 30% additional first-year depreciation. However, an election can be
made to have the 30% additional first-year depreciation deduction apply to
50% depreciation property instead of the 50% additional first year depreciation
deduction. It is also possible to elect not to claim the additional first-year
depreciation deduction.
References:
We replaced the roof on a residential rental property and need to
know what to use for the classification and recovery period to calculate depreciation?
Replacement of a roof on a residential rental property is a capital improvement
to the structure. The roof is in the same class of property as the property
to which it is attached. Since the property is residential rental property,
the roof is generally depreciated over a residential rental property recovery
period of 27.5 years using the straight line method of depreciation and a
mid-month convention. You cannot write off (or take a loss on) any remaining
basis in the replaced roof. For more information, refer to Publication 527, Residential
Rental Property, and Publication 946, How to Depreciate Property.
References:
On residential rental property, would new windows and siding be
considered a repair that could be deducted against income, or would they be
capitalized as an improvement?
Replacement of windows and siding on a residential rental property is a
capital improvement to the structure, provided the replacement improves the
value of this property or substantiality prolongs its life. The windows and
siding, in that event, are in the same class of property as the property to
which they are affixed. In this case, the windows and siding are generally
depreciated over a recovery period of 27.5 years using the straight line method
of depreciation and a mid-month convention. For more information, refer to Publication 527, Residential Rental Property, and Publication 946, How
to Depreciate Property.
References:
We have incurred substantial repairs to our rental property: new
roof, gutters, windows, furnace, and outside paint. What are the IRS rules
concerning depreciation?
Replacements of roof, rain gutters, windows, and furnace on a residential
rental property are capital improvements to the structure because they materially
add to the value of your property or substantially prolong its life. The items
would be in the same class of property as the rental property to which to
which they are attached. Since the property is residential rental property,
the items are generally depreciated over 27.5 years using the straight line
method of depreciation and a mid-month convention.
Repairs, such as repainting the house, are currently deductible expenses.
A repair keeps your property in good operating condition. It does not materially
add to the value of your property or substantially prolong its life. Repainting
your property inside or out, fixing gutters or floors, fixing leaks, plastering,
and replacing broken windows are examples of repairs. If you make repairs
as part of an extensive remodeling or restoration of your property, the whole
job is an improvement. In that case, you should capitalize and depreciate
the repair costs as the same class of property that you have restored or remodeled
as discussed above. For more information, refer to Publication 527, Residential
Rental Property, and Publication 946, How to Depreciate Property.
References:
How many years do I depreciate a new furnace installed as an improvement
on residential rental property and what method do I use to compute the depreciation?
Replacement of a furnace in a residential rental property is a capital
improvement to the structure. The furnace is in the same class of property
as the property in which it is installed. Since the property is residential
rental property, the furnace is, generally, depreciated over a recovery period
of 27.5 years using the straight line method of depreciation and a mid-month
convention. For more information, refer to Publication 527, Residential
Rental Property, and Publication 946, How to Depreciate Property.
References:
I purchased a snowblower and a lawn mower strictly for use at a
residential apartment building I own. Can I elect the section 179 deduction
to fully deduct the costs of the snowblower and lawn mower?
You cannot claim section 179 expense for property held to produce rental
income (since it is use in connection with the furnishing of lodging). These
assets are classified as 5-year property and must be depreciated under MACRS
(Modified Accelerated Cost Recovery System).
You can claim a special depreciation allowance for qualified property you
acquired service after September 10, 2001 and before January 1, 2005. The
allowance is a depreciation deduction equal to 30% of the property's depreciable
basis. The special depreciation is figured before you calculate your regular
depreciation. To qualify for the special deduction the property must:
Be new property that is depreciated under MACRS with a recovery period
of 20 years or less.
Be property that was acquired after September 10, 2001 and before January
1, 2005.
Be property that was placed in service Before January 1, 2005.
Be property that the original use began after September 10, 2001.
See Publication 946 , How to Depreciate Property for
additional information on the special deduction.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 modified the
bonus depreciation rule by substituting a 50% special depreciation allowance
for the 30%, for property acquired after May 5, 2003 and before January 1,
2005. No binding contract for acquisition can be in effect before May 6, 2003.
Property eligible for the 50% additional first-year depreciation deduction
is not eligible for the 30% additional first-year depreciation deduction apply
to 50% depreciation property instead of the 50% additional first-year depreciation
deduction. It is also possible to elect not to claim the additional first-year
depreciation.
References:
I expensed equipment and furniture (not used for residential rental
property) two years ago under section 179, but stopped doing business last
year. Does any of this have to be recaptured and claimed as income, even though
the items have not been sold?
If you claim a section 179 deduction for the cost of property in the year
you place the property in service, and in a subsequent year, you do not use
it more than 50 percent for business, you may have to recapture part of the
section 179 deduction. This can occur in any year during the recovery period
for the property even though the items have not been sold. Refer to Publication 946, How to Depreciate Property, on how to calculate the recapture
amount. The recapture amount is computed on part IV of Form 4797 (PDF), Sale of Business Property, and is included as other
income on line 6 of Form 1040, Schedule C (PDF), Profit
or Loss from Business (Sole Proprietorship).
References:
When an individual sells a building, what depreciation is being
recaptured? Is it the amount of depreciation taken in the prior years or the
depreciation left?
Generally, the amount of depreciation you must recapture for residential
rental or nonresidential real property is the excess of the depreciation allowed
or allowable over straight line depreciation for the property. Thus, if you
sell a building placed in service after 1986 which required the use of the
straight-line method, you would not have any depreciation to recapture. However,
if you took the 30% special depreciation allowance for your building, this
allowance may be subject to recapture. For property placed in service in 1986
and earlier, see Publication 946, How to Depreciate Property.
For further information, refer to Publication 544, Sales or Other
Disposition of Assets, and Supplement to Publication 946, How
to Depreciate Property.
References:
How do I recapture depreciation on rental property that has been
sold?
If you dispose of residential rental property placed in service after 1986
(or after July 31, 1986, if the election to use MACRS was made), you would
not have any depreciation to recapture because you used a straight-line method.
If you do have depreciation to recapture resulting from a gain on the sale,
or because you did not meet the condition above, use Form 4797 (PDF), Sale of Business Property, to compute the amount of
depreciation recapture.
References:
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