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. 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. 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. 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 The average useful life for straight-line depreciation for buildings and improvement is 15-44 years, and 5-15 years for machinery and equipment.
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.
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:
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.
Related terms:
Accelerated Depreciation
Accelerated depreciation is any depreciation method used for accounting or income tax purposes that allow for higher deductions in the earlier years. read more
Accumulated Depreciation
Accumulated depreciation is the cumulative depreciation of an asset up to a single point in its life. read more
Alternative Depreciation System (ADS)
Alternative Depreciation System is a depreciation schedule with a straight-line recovery period that generally better reflects the asset's income. read more
Amortization of Intangibles
Amortization of intangibles is the process of expensing the cost of an intangible asset over the projected life of the asset. read more
Capitalize
To capitalize is to record a cost/expense on the balance sheet for the purposes of delaying full recognition of the expense. In general, capitalizing expenses is beneficial as companies acquiring new assets with long-term lifespans can amortize the costs. read more
Cost Basis
Cost basis is the original value of an asset for tax purposes, adjusted for stock splits, dividends and return of capital distributions. read more
Depreciation
Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account for declines in value over time. read more
Federal Income Tax
In the U.S., the federal income tax is the tax levied by the IRS on the annual earnings of individuals, corporations, trusts, and other legal entities. read more
Long-Term Assets
Long-term assets are investments in a company that will benefit the company and remain on its books for many years to come. read more
Modified Accelerated Cost Recovery System (MACRS)
MACRS is a depreciation system allowed by the IRS for tax purposes. read more