Can Depreciation Expenses Be Tax Deductible?

Written by eric novinson
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Depreciation expenses are expenses that a business records as equipment wears out. A business reports these expenses as costs on its financial statements, and can deduct depreciation from taxes. Many types of assets, including cars, trucks, buildings, machinery and other physical assets, can be depreciated. Land does not depreciate, although any improvements such as roads and bridges on the property do depreciate.

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Ownership

Depreciation is tax deductible for the owner of the property. The Internal Revenue Service allows a person who has taken out a secured loan, such as a car loan or a mortgage, to claim depreciation expenses. When the owner leases the property, such as a landlord leasing an apartment complex to another real estate investor, the owner can only deduct depreciation if the other investor does not have to return the property in its new condition, without wear and tear.

Business Use

Depreciation only applies to the use of assets that the owner uses for business purposes. If the owner uses a truck to deliver packages on some days, and drives it for personal errands on other days, the owner must report the percentage of personal and business use for the truck. The owner can personally own the asset; it does not have to be registered as the property of a business.

Long-Term Assets

Depreciation applies to long-term assets of a business that the business uses to earn operating income. According to the Internal Revenue Service, a business cannot depreciate its inventory, because the business sells inventory to customers and doesn't use it to manufacture more products. The business asset must have a normal lifetime of more than a year to qualify for depreciation.

Section 179 Alternative

The Section 179 deduction is an alternative to depreciation. According to the Small Business Administration, a business can use the Section 179 deduction to immediately write off the purchase of many business assets as an expense, providing a large immediate tax deduction. Because the business reports the full cost of these assets as an expense, it cannot report depreciation on the properties to gain tax deductions in future years.

Accelerated Depreciation

Tax law allows accelerated depreciation for many business assets. The Modified Accrued Cost Recovery System includes methods such as double-declining balance depreciation that allow the business to report a higher percentage of the depreciation expense up front. The reason for this acceleration is that some assets, such as cars and trucks, lose a much higher percentage of their value in the first few years than they do near the end of their lifetime. Standard depreciation deducts the same percentage of the item's cost each year, based on its expected lifespan.

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