Which assets cannot be depreciated? As a business owner, it’s important to know which assets can — and cannot — be depreciated in order to properly calculate your tax obligations.
In this article:
- Asset depreciation reduces your tax liability by deducting a part of the asset’s purchase price over the asset’s lifetime until the cost is fully recovered.
- However, some assets, like land, cannot be depreciated.
What is asset depreciation?
Major business purchases, like machinery, are considered large assets. Depreciation is both an accounting and tax calculation method.
From an accounting perspective, rather than deducting the entire cost of the purchase of a major asset in one year, you allocate the purchase price over the span of the asset’s lifetime.
From a tax perspective, you may be able to choose between:
- Deducting the entire purchase price in the year placed in service or
- Deducting the purchase price over the asset’s lifetime
As the IRS explains: “Depreciation is the recovery of the cost of the property over a number of years. You deduct a part of the cost every year until you fully recover its cost.”
Ultimately, depreciation reduces a company’s tax liability over the years of that asset’s lifetime.
In order for an item to be considered depreciable, the IRS stipulates it must be:
- Under your ownership
- Used to produce business income
- Have a lifespan of at least one year
- Placed in service (actually installed and in use by the business)
Examples of business assets that can be depreciated include:
- Machinery
- Buildings
- Vehicles
- Computers
- Office furniture
The above list isn’t exhaustive. By working with a Landmark CPA, you can ensure you’re properly depreciating the correct assets.
Which assets cannot be depreciated?
Which assets cannot be depreciated, then?
Land
Land is an asset that cannot be depreciated since it has unlimited lifetime value. However, buildings on the land or improvements to the land can potentially be depreciated.
Personal property
If it’s not used for business purposes, it can’t be depreciated.
But what about vehicles used for both business and personal purposes? The IRS stipulates that you can only depreciate the portion used for business purposes.
So how do you calculate this?
The vehicle depreciation rules are not straightforward, as with most tax-related matters.
For passenger vehicles used for both personal and business purposes, there are two depreciation methods you can choose from: actual expense method or standard mileage rate. Each calculation method has different depreciation rules since the standard mileage rate has a depreciation allowance built into that rate. Working with a CPA can help you determine which calculation method benefits you the most.
Heavy SUVs, pickups, and vans have different depreciation rules, which actually tend to be more favorable than passenger vehicles. You can read more about vehicle depreciation here.
Leased property
Property must be owned by you, not just leased, in order to be depreciated.
Collectibles (like art, coins, or memorabilia)
Any collectibles — including that incredible fine art piece that’s hanging in your conference room — cannot be depreciated.
Any assets used for less than a year
As the IRS stipulates, all assets must have a lifespan value of at least one year in order to be depreciated.
Work with a Landmark CPA to reduce your tax obligations through proper asset depreciation
Work with a Landmark CPA to reduce your tax obligations and properly calculate your asset depreciations.