What is depreciable property?
Depreciable property is any asset eligible for tax and accounting purposes to be recognized depreciation in accordance with Internal Revenue Service (IRS) rules. Depreciable property can include vehicles, real estate (excluding land), computers and office equipment, machinery and heavy equipment. Depreciable assets are long term assets.
Key points to remember
- Depreciable assets are allowed to be depreciated over their useful life, such as a vehicle, machine or building.
- Depreciable assets must be used for business purposes and have a determinable useful life greater than one year.
- These assets can be depreciated using various methods as long as they have a consistent cost basis, useful life and terminal value.
Understanding Depreciable Assets
IRS Publication 946, “How to Depreciate Property,” defines depreciable property. According to the publication, to be depreciable, a property must meet all of the following requirements:
- It must be a property you own.
- It must be used in connection with your business or income-generating activity.
- It must have a determinable lifespan.
- Expect it to last over a year.
Fixed assets (fixed assets) are depreciable assets, as are certain intangible assets such as patents, copyrights and computer software. However, IRS Publication 535 also lists patents and copyrights as intangible property that must be amortized instead of being amortized. The amortization or impairment of these intangible assets generally depends on the characterization of their useful life.
In some cases, companies may choose to capitalize an asset, take an expense (to write) in the current tax period and waiving future depreciation, making it a non-depreciable asset, in accordance with the IRC section 179 rules.
Example of depreciable property
PepsiCo Inc. lists land, buildings and improvements, machinery and equipment (including fleet and software), and construction in progress under its property, plant and equipment account. The average useful life of straight-line depreciation for buildings and improvements is 15 to 44 years and 5 to 15 years for machinery and equipment. Land is not depreciable property. In fiscal 2017, the company recorded $2.2 billion in amortized expenses and $21.9 billion in accumulated depreciation. None of its intangible assets have been amortized.
Common depreciation methods
Two common depreciation methods are straight line and accelerated. Straight-line depreciation generates a constant charge each year, while accelerated depreciation collects expenses in the first years. Some companies choose the accelerated method to further protect their income from tax, although their reported net profits are lower in previous years. This will reverse in subsequent years as less depreciation expense will be recorded.
Regardless of the depreciation method used, the depreciable property must have the same cost basisuseful life and salvage value at the end of its useful life.
