Property that May be Depreciated

To be depreciable:

  • You must own the property (not lease it).
  • It must be used in a trade or business or in an income-producing activity.
  • It must have a determinable useful life. For example, land and antiques don't wear out and therefore, they have no determinable useful life (they may last forever). Consequently, they're not depreciable.
    • Exception: An antique actually used in the business may be depreciated because of wear and tear even though it may not have a determinable use life. If you can show an asset is subject to exhaustion, ware and tear or obsolescence the asset may be depreciated; useful life is irrelevant.

Patents and Copyrights

You may depreciate patents and copyrights using the straight-line method of depreciation only if they are not classified as section 197 intangibles (assets acquired in connection with the purchase of a business). Section 197 intangibles must be amortized over 15 years.

Example:

You acquired a patent that is not a section 197 intangible asset. It has a remaining useful life of 10 years. It cost you $10,000.

You may depreciate the patent over 10 years using the straight-line method. Your annual depreciation is $1,000 ($10,000/10).

  • If the patent was purchased in connection with the purchase of a business it would be classified as a section 197 intangible. In this case, you must amortize its cost over 15 years. Your annual amortization would be $667 ($10,000/15)
  • The useful life of patents is the lesser of:
    • The life granted by the government, or
    • The remaining life when acquired
  • If a patent or copyright becomes worthless in any year, all remaining undepreciated cost may be depreciated in that year.

File your personal and small business taxes (Schedule C)