Internal Revenue Service
Small Business and Self-Employed
Taxpayer Education and Communication
Tax Information for
Small Businesses
Internal Revenue Service
Small Business and Self-Employed
Taxpayer Education and Communication
CONSTRUCTION
Depreciation
IRC Section 167(a),
168 & 179a
Internal Revenue Service
Small Business and Self-Employed
Taxpayer Education and Communication
What is Depreciation?
• Property used for business
• Property expected to last more than one year
• Represents wear, decay, usage,
obsolescence, or loss of value due to natural
causes
Internal Revenue Service
Small Business and Self-Employed
Taxpayer Education and Communication
What can be Depreciated?
• Real Property:
– Any building or structure built on land; plants or
trees grown on land; and attachments or
improvements to land
• Personal Property:
– Cars, trucks, machinery, furniture, equipment, and
all other tangible items which are not real property
Internal Revenue Service
Small Business and Self-Employed
Taxpayer Education and Communication
What cannot be Depreciated?
• Property placed in service and disposed of in
the same year
• Inventory
• Land
• Repairs and replacements that do not
increase the value of your property; make it
more useful; or lengthen its useful life
Internal Revenue Service
Small Business and Self-Employed
Taxpayer Education and Communication
How to Figure Depreciation
• Basis
• Class Life
• Placed in Service Date
• Convention
• Method
Internal Revenue Service
Small Business and Self-Employed
Taxpayer Education and Communication
Definitions
• COST BASIS: Usually the purchase price,
including sales tax, freight, and installation
charges.
• ADJUSTED BASIS: Increase cost basis by
improvements. Decrease basis by
depreciation deductions.
Internal Revenue Service
Small Business and Self-Employed
Taxpayer Education and Communication
Compute Basis
Example:
Adam bought a dump truck from a local
contractor. He paid $2,000 cash, borrowed
$3,000 from the bank, and agreed