What Business Owners Need To Know About Depreciation

Depreciation is an annual tax deduction that allows small businesses to recover the costs of certain property that decreases in value over its lifetime. It's an allowance for the wear and tear, deterioration, or obsolescence of the property.

As a business owner, you can depreciate property when you place it in service for use in your trade or business or to produce income. You stop depreciating property when it has fully recovered its cost or when it's retired from service, whichever happens first.

What's depreciable?
Machinery, equipment, buildings, vehicles and furniture that are owned by the business. You cannot claim depreciation on personal property. If you use an asset — a car, for instance — for both business or investment and personal purposes, you can depreciate only the business or investment use portion. Land is never depreciable, although buildings and some land improvements may be.

To depreciate property, your business must:

Consider the Methods
The IRS allows you to use different depreciation methods, depending on the type of property.

The modified accelerated cost recovery system is used to recover the basis of most business and investment property placed in service after 1986. MACRS consists of two depreciation systems, the general depreciation system and the alternative depreciation system. Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions.

Sometimes, however, you will use the straight-line method, which lets you deduct the same amount of depreciation each year over the useful life of the property. There is also the forecast method, in which each year's depreciation deduction is equal to the cost of the property multiplied by a fraction. The fraction is the current year's net income from the property over the anticipated net income that the property will bring in 10 years after it is placed in service.

New for 2022
There have been several depreciation updates for 2022, including:

There are many deductions a business owner can take. This is just a short list. Your best bet is to work closely with MHCS to make sure you're getting all the breaks you're entitled to.