The tax laws and accounting standards that apply to the depreciation of business assets can be complex, confusing and difficult to decipher. In general terms, depreciation is allowed on tangible and intangible property with a limited useful life of more than one year that is used in a trade or business or held for the production of income.
The information required for the depreciation calculations are as follows:
1. Property type – the 2 basic types of property are real and personal. Real property includes buildings and their structural components. Personal property includes all depreciable property other than real.
2. Service date – depreciation begins when an asset is first placed in a condition or state of readiness and availability for a specifically assigned function.
3. Useful life – the number of years that depreciable business equipment or property is expected to be in use.
4. Cost basis – depreciable basis equals acquisition cost less any salvage value.
5. Depreciation methods – how to spread the cost or other basis of an asset over its useful life.
6. First year conventions – refers to figuring how much of the cost you may depreciate the first year, based on when during that year you purchased and put the item to use in your business.