Depreciation Methods
The depreciation method that you use for any particular asset
is fixed at the time you first place that asset into service. Whatever
rules or tables are in effect for that year must be followed as long
as you own the property. Since Congress has changed the depreciation
rules many times over the years, you may have to use a number of different
depreciation methods if you've owned business property for a long
time.
For most business property placed in service after 1986,
if you don't claim the equipment expensing deduction for the full
cost of the item, the IRS requires you to depreciate the asset using
a method called "MACRS," which stands for Modified Accelerated Cost
Recovery System. This method categorizes all business assets into
classes and specifies the time period over which you can write off
assets in each class.
Some assets
are not eligible for MACRS depreciation, including intangible
assets such as patents, trademarks, and business goodwill. Generally
these must be amortized (written off in equal amounts) over a 15-year
period, beginning in the month of acquisition.
Once you know
the classification and the tax basis of
the asset you need to depreciate, you can use a special table provided
by the IRS to determine the percentage of the item's tax basis that
can be deducted each year. MACRS provides for a slightly larger write-off
in the earlier years of the cost recovery period. The full set of
depreciation tables showing the MACRS percentages are available in
the IRS's free publication 946, How to Depreciate Property, available
on the Internet at the IRS
web site or by calling 1-800-TAX-FORM.
Some special variations of MACRS, or other depreciation
methods, are available (or even mandatory) in certain situations.
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