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 (IRS) rules. Depreciable property can include vehicles, real estate (except land), computers, and office equipment, machinery, and heavy equipment. Depreciable property items are long-term assets.

Key Takeaways

  • Depreciable property is allowed to have depreciation accounted for over the 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.

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 property 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.

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 2017, the company recorded $2.2 billion in depreciated expenses and had $21.9 billion in accumulated depreciation. None of its intangible assets were depreciated.

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 its reported net profits will be less in earlier years. This will reverse in the later years, as less depreciation expense is recorded.

Regardless of 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.