TurboTax / Tax Calculators & Tips / All Tax Guides / Small Business Taxes / Depreciation of Business Assets

Depreciation of Business Assets

Updated for Tax Year 2014


OVERVIEW

In an effort to stimulate the economy by encouraging businesses to buy new assets, Congress approved special depreciation and expensing rules for property acquired in 2014. However, beginning in 2015, we are back to the old depreciation rules.


Business and personal taxes in one

Just answer simple questions about your business and life, and TurboTax Home & Business takes care of the rest.

For only $104.99*
Start for Free

Special Bonus Depreciation and Enhanced Expensing for 2014

Because business assets such as computers, copy machines and other equipment wear out, you are allowed to write off (or "depreciate") part of the cost of those assets over a period of time. These tips offer guidelines on depreciating small business assets for the best tax advantage.

An asset is property you acquire to help produce income for your business.

For tax purposes, there are six categories of non-real estate assets. Each has a designated number of years over which assets in that category can be depreciated. Here are the most common:

  •     Three-year property (including tractors, certain manufacturing tools, and some livestock)
  •     Five-year property (including computers, office equipment, cars, light trucks, and assets used in construction)
  •     Seven-year property (including office furniture, appliances, and property that hasn't been placed in another category)
You are allowed to write off real estate over a longer time period:
  •  27.5 years (residential rental properties)
  • 39 years (commercial buildings)

Land is not depreciable (it doesn't wear out), but land improvements such as roads, sidewalks or landscaping may be written off over periods of 10, 15 or 20 years depending on the specific nature of the asset.

NOTE: When you use TurboTax Business and TurboTax Home & Business software to prepare your business tax return, we do the math for you. All you do is answer a few simple questions about each asset.

Types of Depreciation

There are three primary methods you can use to depreciate your business assets:

Straight-Line Depreciation

It's the simplest method but also the slowest, so it's rarely used.

For example:

You buy a copy machine for $1,600 at the end of March. Assuming the machine has a salvage value of $400, you can depreciate $1,200 of the cost over the life of the copier. A copy machine is considered 5-year property for tax purposes. Under the normal rules, using the straight-line method, you can take the following deductions in the first three years: 

    Period

    Calculation

  Deduction

  First year

  $1,200 / 5 x 75%* 

    $180

  Second year

  $1,200 / 5

    $240

  Third year

  $1,200 / 5 

    $240

The 75% calculation represents the "half-year convention" for assets not in service the entire year.

For new assets put into use after September 8, 2010, and before January 1, 2012, however, Congress increased the special 50% bonus depreciation to 100% in the 2010 Tax Relief Act; The previous 50% bonus depreciation is available for qualified property placed in service in 2012, 2013, and 2014. Under current law, bonus depreciation is not available in 2015.

Accelerated Depreciation

This method is the one most commonly used by small businesses. It lets you take a larger deduction in the first few years and a smaller write-off later. In the tax world, the most common accelerated method is called MACRS (Modified Accelerated Cost Recovery System). You don’t have to take salvage into account, as you do with straight line, and you generally use what’s called the "half-year convention," which means that the deduction that would otherwise be allowed for the first year is halved, regardless of what month you started using the asset in your business. (Exception: if you acquired more than 40% of your assets in the last three months of the year, you would use the "midquarter convention," meaning that all the assets acquired in each quarter would be depreciated starting at the midpoint of that quarter.) MACRS depreciation starts off at 200% of the straight-line depreciation rate and then switches over to the straight-line method for the remaining depreciable balance at the most opportune time to maximize your write-offs.

For example:

Here’s how it works under the normal rules: Say your business bought $2,000 worth of office furniture and started using it May 1. Office furniture falls into the 7-year category. The first three years of MACRS depreciation deductions would be: 

    Period

   Calculation

    Deduction

  First year

  $2,000 / 7 x 200% x 50%*

      $286

  Second year

  ($2,000 - $286) / 7 x 200%

      $490

  Third year

  ($2,000 - $776) / 7 x 200%

      $350

 *The 50% calculation represents the "half-year convention."

TurboTax Tip: Although most business owners choose accelerated depreciation, it may not be prudent to take the biggest deductions in the first years that you are in business. Assuming that you will earn more income as the business grows, you may want to use the straight-line method, which may give you the best long-term tax benefit.

NOTE: If you choose the straight-line method to depreciate an asset, you cannot switch to MACRS later. However, you may use a different method for assets acquired in subsequent years.

Section 179 Expense Deduction

It's a dry name for a deduction (taken from a line in the Internal Revenue Code) but it allows you to deduct the entire cost (subject to certain limitations) of an asset in the year you acquire and start using it for business.

Here are the rules and limitations:

  • The asset must be tangible personal property, including software (not real estate).
  • It must be used in a trade or business (property used in a rental activity is generally not eligible).
  • You must take the deduction in the year you start using the asset.
  • The decision to use Section 179 must be made in the year the asset is put to use for business.
  • The deduction cannot be more than your earned income (net business income and wages) for the year.

For 2014, the maximum Section 179 deduction is $500,000. If your total acquisitions are greater than $2,000,000 the maximum deduction begins to be phased out.

If the business is an S corporation, partnership or multi-member LLC, it cannot pass the Section 179 deduction on to shareholders, partners or members unless the business has income. The individual must also have earned income to take the deduction.

NOTE: TurboTax walks you through the Section 179 deduction for applicable assets, and handles the calculations, too.

TurboTax Tips

  • Any Section 179 deduction that is not used in the current year because it is greater than your business income can be carried over to subsequent years.
  • If a business (S corporation, partnership or LLC) has no operating income but the shareholder, partner or member has taxable income, it might be better for the business to use regular depreciation. Regular depreciation becomes part of the business operating loss that passes through to the shareholder, partner or member.

Why use regular depreciation?

It might seem like an easy choice to use expensing if you qualify. But in some cases, it might pay to use regular depreciation. That could be the case if you expect your business income—and hence your business tax bracket—to rise in the future. A higher tax bracket could make the deduction worth more in later years.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

* Important Offer Details and Disclosures
  • Try for Free/Pay When You File: TurboTax online and mobile pricing is based on your tax situation and varies by product. Actual prices are determined at the time of print or efile and are subject to change without notice. Special discount offers may not be valid for mobile in-app purchases.
  • TurboTax CD/Download products: Price includes tax preparation and printing of federal tax returns and free federal efile of up to 5 federal tax returns. Additional fees apply for efiling state returns. E-file fees do not apply to New York state returns. Prices subject to change without notice.
  • TurboTax Mobile: Actual prices are determined at the time of print or efile and are subject to change without notice. Come back here before you file to confirm that the price has not changed, especially if it's been a while since you downloaded this app.
  • Anytime, anywhere: Internet access required; standard message and data rates apply to download and use mobile app features and content. TurboTax mobile app devices supported include Android 4.1 and above, iOS 8 on iPhone 4s and above, and iPad 2.
  • Fastest refund possible: Fastest tax refund with efile and direct deposit; tax refund timeframes will vary.
  • Pay for TurboTax out of your federal refund: A $34.99 Refund Processing Service fee applies to this payment method. Prices are subject to change without notice.
  • About our TurboTax Product Experts: Customer service and product support (phone or chat) vary by time of year. Phone support not included with Free Edition.
  • About our credentialed tax experts: Live tax advice service is available for your toughest tax questions; fees may apply. Service, experience levels, hours of operation and availability vary, and are subject to restriction and change without notice. Click here for full terms and conditions. Not available for TurboTax Business customers.
  • Get up to 10% on top of your federal refund: Amazon.com Gift Card offer is for federal refunds only. Limits apply ($2000 per e-card, maximum $10,000 per customer). Offer available only for TurboTax Online (except Federal Free Edition) or CD/download versions sold and shipped, or downloaded directly from Intuit or Amazon. Except as required by law, Amazon.com Gift Cards cannot be canceled, transferred for value or redeemed for cash.

    Amazon.com is not a sponsor of this promotion. Except as required by law, Amazon.com Gift Cards ('GCs') cannot be transferred for value or redeemed for cash. GCs may be used only for purchases of eligible goods at Amazon.com or certain of its affiliated websites. For complete terms and conditions, see www.amazon.com/gc-legal. GCs are issued by ACI Gift Cards, Inc., a Washington corporation. All Amazon ®, ™ & © are IP of Amazon.com or its affiliates. No expiration date or service fees.
  • #1 best-selling tax software: Based on aggregated sales data for all tax year 2013 TurboTax products.
  • 4.8 out of 5 stars: Average based on customer ratings on TurboTax.com for TurboTax Online and CD/download products tax year 2014, as of January 2015.
  • Most Popular: TurboTax Deluxe is our most popular product among TurboTax Online users with more complex tax situations.
  • TurboTax CD/Download priority phone support: Priority phone support for TurboTax CD/Download Premier and Home & Business is accessible exclusively via the TurboTax.com Help Center.
  • Benefit Assist: After you file, TurboTax automatically shows you a full list of government benefits you may qualify for, like Food Stamps or reduced phone & utilities. Plus, we help you apply, saving you time and making it easier than ever to get more money! Estimate based on calculation of Benefit Assist users from tax year 2013 and published reports of average benefit and savings amounts from federal and state programs. Actual amounts and qualifications based on your individual situation; some individuals will not qualify. Feature may not be available for all customers.
  • Simplified State Experience: New, simplified state tax preparation available for most filers.
  • Eligibility for $25 cash back for returning Deluxe customers: Customers who have completed their 2013 taxes in TurboTax Deluxe (CD or download), and have completed their 2014 taxes in either TurboTax Premier or TurboTax Home & Business (CD or download), and apply here before 11:59PM PDT April 20, 2015, are eligible for $25 back. 2014 TurboTax Advantage users are ineligible for this offer. Terms and conditions are subject to change without notice.
  • $0 Upgrade Offer: Valid for customers who filed their 2013 taxes with TurboTax Deluxe (CD or download), completed prior year data transfer this year, and encounter an upgrade to either 2014 TurboTax Premier or 2014 TurboTax Home & Business (CD or download). Valid February 6, 2015 through April 20, 2015. TurboTax Advantage users are ineligible for this offer. This offer may not be combined with our $25 cash back offer. Terms and conditions are subject to change without notice.