Tax Tips

Generally, you can't deduct in 1 year the entire cost of property you purchased, either for use in your trade or business or to produce income, if the property has a useful life substantially beyond the tax year.

Instead, you can depreciate it. You spread the cost over a number of years and deduct a part of the cost each year.

What to Depreciate

The kinds of property that you can depreciate include machinery, equipment, buildings, vehicles and furniture. You can't claim depreciation on property held for personal purposes.

If you use property, such as a car, for both business or investment and personal purposes, only the business or investment use portion may be depreciated. You may depreciate property that meets all 5 of the following tests.

1. It must be property you own.
2. It must be used in a business or other income-producing activity.
3. It must have a determinable useful life.
4. It must be expected to last more than one year.
5. It must not be excepted property (certain intangible property, certain term interests and property placed in service and disposed of in the same year).

If you're depreciating property you placed in service before 1987, you must use the Accelerated Cost Recovery System (ACRS) or the same method you used in the past. For property placed in service after 1986, you generally must use the Modified Accelerated Cost Recovery System (MACRS).

Section 179

Section 179 allows you to deduct in 1 year the cost of property that is otherwise required to be depreciated. There are limits on the amount you can deduct in a tax year. You can deduct up to $250,000 of the cost of eligible business property in 2008 (the limit is higher if you placed the property in service in a qualified enterprise zone, qualified renewal community property, the Kansas disaster area or GO Zone — certain parts of the area affected by Hurricane Katrina). This deduction is reduced if you purchase more than $800,000 (a higher limit applies to certain property placed in service in the GO Zone and to disaster assistance property placed in service in a federally declared disaster area if the disaster occurred after Dec. 31, 2007) of eligible property for the year. Real estate and property used mainly in connection with furnishing lodging are not eligible for this deduction.

The eligible property must be acquired for business use and acquired by purchase. Eligible property includes the following:

• off-the-shelf software
• machinery and equipment
• property contained in or attached to a building, other than structural components
• gasoline storage tanks and pumps at retail service stations
• livestock

The Section 179 deduction can't exceed your taxable income from businesses (including wages) for the year.

Special Depreciation Allowance

Taxpayers who place certain property in service in 2008 can deduct 50% of the cost in 2008 and depreciate the remainder of the cost as usual. This deduction applies only to the part of the cost for which you don't claim the Section 179 deduction. You can elect to not claim this deduction and depreciate the property under the usual rules. Eligible property generally must be new tangible property with a recovery period of 20 years or less. Special rules apply to property placed in service in the GO Zone or the Liberty Zone (certain areas in New York), and to certain energy property or certain disaster assistance property.