- The IRS recommends using the modified accelerated cost recovery system for tax depreciation of most assets. The IRS also offers businesses information on different types of assets and recommended recovery periods. Once the business acquires an asset, the business can use this reference to calculate the depreciation of the asset. For example, the IRS recommends that, in most cases, business should depreciate a rental property over 27.5 years.
- The IRS allows a business to deduct many expenses for items purchased in the same year. However, if the asset acquired has an expected life of more than one year, such as heavy machinery or property, the IRS does not allow the business to deduct the full cost of the asset in the year purchased. Depreciation is the process that allows a business to deduct the asset expense over the useful life of the asset. Therefore, depreciation is an expense that can offset income for a business and reduce tax liability.
- The IRS also allows small businesses that purchase certain depreciable assets to write off the entire cost of the asset in the first year. This rule, known as the Section 179 deduction, can greatly benefit a startup businesses. Many assets can qualify under section 179, including furniture, computers, software, machinery and vehicles.
- To receive a deduction for depreciation of an asset, the business must identify for the IRS the method of depreciation used, the depreciable basis of the asset and the useful life of the asset. However, before initiating this process, you should verify that the IRS recognizes the asset as depreciable. The business also must inform the IRS whether it plans to expense any part of the asset and whether the asset qualifies for special treatment under Section 179.
Modified Accelerated Cost Recovery System
Basics of Depreciation
First-Year Expensing
Identifying the Asset
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