What Is Depreciable Property?

What Is Depreciable Property?

Depreciable property is any asset that is eligible for tax and accounting purposes to book depreciation in accordance with the Internal Revenue Service's (IRS) rules. Depreciable property can include vehicles, real estate (except land), computers, office equipment, machinery, and heavy equipment. Depreciable property items are considered long-term assets.

Key Takeaways

  • Depreciable property is an asset that is allowed to have depreciation accounted for over its useful life, such as a vehicle, machine, or building.
  • Depreciable property must be used for business purposes and have a determinable useful life in excess of one year.
  • Such property may be depreciated using various methods as long as it has a consistent cost basis, useful lifespan, and terminal value.
  • Two common depreciation methods are straight-line depreciation and accelerated depreciation.

Understanding Depreciable Property

IRS Publication 946, "How to Depreciate Property," defines a depreciable property. According to the publication, to be depreciable, property must meet all of the following requirements:

  • It must be a property you own.
  • It must be used in your business or income-producing activity.
  • It must have a determinable useful life.
  • It must be expected to last for more than one year.

Property, plant, and equipment (PP&E) are depreciable assets, as are certain intangible properties such as patents, copyrights, and computer software; however, IRS Publication 535 also lists patents and copyrights as intangibles that must be amortized instead of depreciated. Whether these intangibles are amortized or depreciated generally depends on the characterization of their useful life

In some cases, businesses can choose to capitalize an asset, taking an expense (write off) in the current tax period and forgoing future depreciation, thus rendering it a non-depreciable asset, following IRC section 179 rules.

Common Depreciation Methods

Two common depreciation methods are straight-line and accelerated. Straight-line depreciation generates a constant expense each year, while accelerated depreciation front-loads the expense in the early years. Some companies choose the accelerated method to shield more income from tax, though their reported net profits will be less in earlier years. This will reverse in the later years, as less depreciation expense is recorded.

Regardless of the method of depreciation employed, the depreciable property must have the same cost basis, useful life, and salvage value upon the end of its useful life.

Example of Depreciable Property

PepsiCo Inc. lists land, buildings and improvement, machinery and equipment (including fleet and software), and construction-in-progress under its PP&E account. The average useful life for straight-line depreciation for buildings and improvement is 15-44 years and 5-15 years for machinery and equipment. Land is not depreciable property. In the fiscal year 2021, the company recorded $2.48 billion in depreciated expenses and had $24.42 billion in accumulated depreciation. None of its intangible assets were depreciated.

What Are Examples of Depreciable Property?

Examples of depreciable property include machines, vehicles, buildings, computers, and more. The IRS defines depreciable property as an asset you or your business owns (if you do not own the asset but make capital improvements towards it, that also counts), you must use the property for your business or any income-generating activity, and, lastly, it must have a useful life that is greater than one year.

What Does It Mean to Depreciate a Rental Property?

Depreciating a property means deducting the cost of buying or renovating a rental property over a period of time rather than all at once. Depreciating the property means you deduct the cost over its useful life.

Is Land a Depreciable Property?

No, land is not a depreciable property and cannot be depreciated as it is considered to last forever and not have a useful life. It is one of the few assets that cannot be depreciated because of its everlasting factor, meaning that its useful life is considered infinite.

How Do You Calculate Depreciable Property?

To calculate depreciation on real estate, you first have to know the cost basis. The cost basis is the value of the property minus the value of the land that it is built on plus any allowable closing costs. You then take this figure and divide it by the useful life of the property. The useful life will vary depending on the depreciation method employed.

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  1. Internal Revenue Service. "Publication 946: How to Depreciate Property," Pages 3-4.

  2. Internal Revenue Service. "Publication 946 - How to Depreciate Property," Page 5.

  3. Internal Revenue Service. "Publication 946: How to Depreciate Property," Page 3.

  4. Internal Revenue Service. "Publication 535: Business Expenses," Page 31.

  5. Internal Revenue Service. "Publication 946: How to Depreciate Property," Pages 9-10.

  6. Internal Revenue Service. "Publication 946 (2021)."

  7. Internal Revenue Service. "Publication 946 (2021)."

  8. PepsiCo, Inc. "Annual Report 2021," Page 106.