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Taxmap/pubs/p911-004.htm#TXMP121d10f2 Cost Recovery

Depreciation

You can usually recover (subtract from income) your cost for capital expenses over a number of years. Each year a part of your basis is recovered through depreciation or amortization. Use depreciation to recover capital expenses for most tangible business assets. Use amortization to recover the cost of intangible assets, such as start-up costs. Amortization is discussed in chapter 9 of Publication 535.

Under certain circumstances, you may be able to recover a limited amount of the cost of qualifying property as a current expense by electing the section 179 deduction rather than recover the cost as a capital expense. The section 179 deduction is discussed later.

Taxmap/pubs/p911-004.htm#TXMP5166dd7c Form 4562.

Generally, use Form 4562 to report depreciation, amortization, and the section 179 deduction. A filled-in Form 4562 is illustrated in an example in Publication 946.

Taxmap/pubs/p911-004.htm#TXMP186013fb Section 179 Deduction

Section 179 election

You can elect to deduct all or part of the cost of certain qualifying property in the year you place it in service. Property is placed in service when it is first made ready and available for a specific use.

Taxmap/pubs/p911-004.htm#TXMP69d6ea3b Qualifying property.

Qualifying property includes tangible personal property for which depreciation is allowable. See chapter 2 in Publication 946 for more information.

Taxmap/pubs/p911-004.htm#TXMP13f4c52b Dollar limit.

The maximum section 179 cost you can choose to deduct for 2003 is generally $100,000.

Certain benefits, including an increased section 179 deduction, are available for certain property you place in service in the New York Liberty Zone or in an empowerment zone.

Taxmap/pubs/p911-004.htm#TXMP0018d432 Business income limit.

The total cost you can deduct each year after you apply the dollar limit is further limited to the taxable income from the active conduct of any trade or business during the year.

Any cost not deductible in one year because of this limit can be carried to the next tax year.

Taxmap/pubs/p911-004.htm#TXMP070e9a10 More information.

For more information, see chapter 2 in Publication 946.

Taxmap/pubs/p911-004.htm#TXMP47fb5c3f Depreciation

Depreciation

If you do not choose a section 179 deduction or you choose a section 179 deduction and do not recover all your cost, you can take a depreciation deduction (which may include a special depreciation allowance for qualified property) for part or all of the cost you did not claim as a section 179 deduction.

Property whose cost can be recovered through depreciation is depreciable property. Depreciable property includes most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. Depreciable property also includes certain intangible property.

You can depreciate property if it meets the following requirements.

• It must be property you own.
• It must be used in your business or income-producing activity.
• It must have a determinable useful life. This means it is something that wears out, decays, gets used up, becomes obsolete, or loses value from natural causes.
• It must be expected to last more than one year.
• It must not be excepted property, such as property placed in service and disposed of in the same year.

You must use the modified accelerated cost recovery system (MACRS) to depreciate most property placed in service after 1986.

For information about the depreciation of property placed in service after 1986, see Publication 946. Chapter 4 contains a detailed discussion on figuring depreciation under MACRS.

For information about the depreciation of property placed in service before 1987, see Publication 534, Depreciating Property Placed in Service Before 1987.

Taxmap/pubs/p911-004.htm#TXMP548620ef Special depreciation allowance.

You can take a special depreciation allowance to recover part of the cost of qualified property placed in service during the tax year. An allowance applies for the first year you place the property in service. For qualified property acquired before May 6, 2003, it is an additional 30% deduction. For qualified property acquired after May 5, 2003, it is an additional 50% deduction, or you can elect to take an additional deduction determined at the 30% rate. You can take the additional 30% or 50% deduction after any section 179 deduction and before you figure regular depreciation under MACRS for the year you place the property in service. For more information, see chapter 3 in Publication 946.

Taxmap/pubs/p911-004.htm#TXMP37d1b357 Listed Property

Listed Property

Listed property includes property which lends itself to personal use such as property used for transportation, entertainment equipment, certain computers, and cellular phones. In addition, there are recordkeeping requirements and rules you must follow when depreciating listed property. If listed property is not used more than 50% for a qualified business use during any tax year, you cannot claim the section 179 deduction or a special depreciation allowance and special rules apply to the depreciation deduction. See chapter 5 in Publication 946.

Taxmap/pubs/p911-004.htm#TXMP307f1f8a Passenger automobiles.

For most passenger automobiles, the section 179 deduction and depreciation deduction (including the special depreciation allowance) you can claim is limited. See Publication 946 for limits that apply for trucks, vans and electric passenger automobiles placed in service in 2003.

For a passenger automobile that is qualified property for a special depreciation allowance (see definitions below) placed in service during 2003, the total of your section 179 deduction and depreciation deduction (including the special depreciation allowance) cannot be more than $10,710 for a car acquired after May 5, 2003 ($7,660 for a car acquired before May 6, 2003). If you elected not to claim the special depreciation allowance for the automobile or if the automobile is not qualified property, the limit is generally $3,060. For 2004 and 2005, the maximum deduction amounts for a passenger automobile placed in service in 2003 are $4,900 and $2,950 respectively. The maximum deduction for each year after 2005 is $1,775.

Qualified property for the 30% special depreciation allowance includes a car that meets all the following requirements.

• You bought the car new after September 10, 2001.
• You placed the car in service for business in 2003.
• You used the car more than 50% in a qualified business use.

Qualified property for the 50% special depreciation allowance includes a car that meets all the following requirements.

• You bought the car new after May 5, 2003.
• You placed the car in service for business after May 5, 2003.
• You used the car more than 50% in a qualified business use.

You can elect to claim the 30% special depreciation allowance instead of the 50% special depreciation allowance for property that qualifies for the 50% allowance. This election applies to all property in the same property class placed in service during the year.

If your business/investment use of the automobile is less than 100%, you must reduce the maximum deduction amount proportionately.

Taxmap/pubs/p911-004.htm#TXMP5a81ae6b
Example.

Peter purchases a used car this year for $4,500 and he uses it 60% for business. The car is not qualified property for the 30% or 50% special depreciation allowance. He chooses to take a section 179 deduction for the car. The cost of Peter's car that qualifies for the section 179 deduction is $2,700 ($4,500 × 60%). However, Peter's section 179 deduction is limited to $1,836 ($3,060 × 60%).

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