Business Deductions

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Updated for 2012

What is Depreciation?

Depreciation represents the loss in value of property used in your business due to ware and tear, decay or obsolescence.

Depreciation is a noncash business expense that reduces gross revenue. It is a noncash expense because no monetary expenditure is required to record the expense in your books.

Depreciation deductions help you recover the cost of property by reducing income, which in turn, reduces taxes (income tax and self-employment tax, if you're self-employed).

Use Form 4562 to claim depreciation.

When to Start and Stop Depreciation

Start depreciation in the year the property is placed in service.

Property is placed in service only if it is both available and ready for use.

If property is only available for use but not ready for use, you cannot begin depreciation.

Example:

Property was delivered to your place of business December 20, 2011 but not installed until January 5, 2012. You must start depreciation in 2012, when the property was both available and ready for use.

If property is both ready and available for use, but is not actually being used, it is still considered placed in service and you may deduct depreciation.

Example:

A machine was placed in service November 1, 2012. It was both available and ready for use.

However, business was slow during November and December of 2012. You started using the machine in January 2013. You may start depreciation in 2012.

Stop depreciation when property is fully depreciated or when you retire it or dispose of it, whichever comes first.

Depreciable basis of property:

The depreciable basis for business property is:

Next:

Depreciation: Types of Property

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