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Small Business Deductions: Depreciation

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Property that May be Depreciated

To be depreciable:

You must own the property (not lease it).
It must be used in a trade or business or in an income-producing activity.
It must have a determinable useful life.
- For example, land and antiques don't wear out and therefore, they have no determinable useful life (they may last forever). Consequently, they're not depreciable.
- Exception: An antique actually used in the business may be depreciated because of wear and tear even though it may not have a determinable use life.
  - If you can show an asset is subject to exhaustion, ware and tear or obsolescence the asset may be depreciated; useful life is irrelevant.

Patents and Copyrights

You may depreciate patents and copyrights using the straight-line method of depreciation only if they are not classified as Section 197 intangibles (assets acquired in connection with the purchase of a business). Section 197 intangibles must be amortized over 15 years.

Example:

You acquired a patent that is not a Section 197 intangible asset. It has a remaining useful life of 10 years. It cost you $10,000.

You may depreciate the patent over 10 years using the straight-line method. Your annual depreciation is $1,000 ($10,000/10).

If the patent was purchased in connection with the purchase of a business it would be classified as a Section 197 intangible. In this case, you must amortize its cost over 15 years. Your annual amortization would be $667 ($10,000/15)
The useful life of patents is the lesser of:
- The life granted by the government, or
- The remaining life when acquired
If a patent or copyright becomes worthless in any year, all remaining undepreciated cost may be depreciated in that year.

Depreciation: Property that May Not be Depreciated

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