Depreciating Equipment for Tax Purposes: What’s Required?

Depreciation is a very complex element of the tax code. It’s best you don’t try to tackle it on your own.

From time to time, you may buy a piece of equipment for your business.  This can be anything from a small computer to a large machine that makes little washers to use in the products you sell to your customers.  You don’t plan to retire this equipment after using it for a year.  Rather, it will be used over a period of years, so you’ll want to depreciate it for tax purposes.

TaxPlan1014image_zps36676295What do you need in order to depreciate a piece of equipment?  First, you must own it.  If you rent a piece of equipment, you cannot take a depreciation deduction for it.  (However, there is a deduction available for rental payments that is recorded on your Schedule C, on another line.)

Second, you have to use it in your business.  You can’t claim depreciation on the family computer that you only use in your business part of the time.  You can take some depreciation, but the amount you can record in depreciation will be reduced by the percentage you use the computer for personal tasks.

Third, the equipment must have a determinable useful life, which must be longer than one year.  In other words, you have to know how long you should be able to use the equipment.  The IRS establishes guidelines that determine the expected life of  specific pieces of equipment.  If you don’t anticipate using it for longer than a year, you should deduct it as another type of expense for the current year.

Finally, you will also need to know the depreciable basis of the property. This is a fancy term for a complicated concept. It’s calculated by taking the amount you paid for the equipment and any parts added to it (to make it run better or last longer), less any casualty losses and any depreciation you had recorded in a prior year.

There will be times when you can’t take depreciation on a piece of equipment or a building you’ve purchased. For example, if you bought some equipment and started using it in your business, but then decided it wasn’t what you needed and got rid of it, you can’t take depreciation on it.  Or if you made the purchase to upgrade another piece of equipment, or added an addition to your home for a home office, you cannot deduct depreciation for it.  You could, however, take depreciation on the value of the upgraded piece of equipment or building.

There are other issues involved in calculating depreciation. This is a very complex area of the IRS tax code, and we don’t expect you to understand it fully. So if you’re planning a major purchase of equipment or other property, let us help you determine the best way to claim it for tax purposes.

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About Brenda J. McGivern, CPA

Brenda McGivern started her own certified public accounting and management consulting firm in October 2001. The full service CPA firm provides tax and accounting solutions to meet the needs of today's small business and individual. Brenda McGivern has become a trusted advisor and valuable resource her clients rely on for timely, accurate assistance when they need it. Before starting the firm, she worked as an accountant for three years at a local firm and prior to that five years at a large international CPA firm in Boston. She has performed the following tax services: federal, state and local tax planning, international tax planning, estate and succession planning, mergers and acquisitions, capital retention and IRS representation. She has also coordinated assurance engagements, such as financial statement audits, reviews and compilations from the planning phase through the reporting phase. She has prepared and reviewed regulatory filings for numerous regulatory agencies including the Security and Exchange Commission. Prior to these positions she was selected from over 2,000 candidates into an eight-person intensive financial management program at an international technology company. The program consisted of graduate level classroom study and two six-month rotational assignments in financial operations. She graduated cum laude from the University of Massachusetts at Amherst and holds a Bachelors Degree in Business Administration with a concentration in accounting. McGivern also holds a license in Massachusetts as a Certified Public Accountant and is a member of the American Society of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants. She resides in Stoughton, Massachusetts with her husband Brian, and their sons Sean, Ryan and Conor and their dog, Davis.
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