Depreciable property is any asset that is eligible for depreciation treatment 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.
Breaking Down 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.
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
The two common depreciation methods are straight-line and accelerated. Straight-line depreciation, the most popular method, 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.