Now that we have reviewed the items necessary to have in hand before you can start to calculate an asset’s depreciation, let’s review which of the uses of property would give rise to needing depreciation in the first place.

There can be some confusion between personal type property (real or personal) and personal-use property. Since, in most cases, personal-use property is not depreciated as it is used for personal and not business reasons, when we refer to “personal property” while talking about depreciation we are talking about personal type property that is business use.

For the most part, depreciation is taken on business use property. As mentioned above, personal use property is not depreciated, investment use property is held for appreciation and therefore not subject to deprecation, and stock-in-trade (inventory) is never depreciated. There are four requirements for property to be depreciated as follows:

1. The taxpayer must normally own the property

2. The property must be used in business or for the production of income.

3. The property must have a determinable useful life.

4. The property’s determinable useful life must be more than one year.

In 1986, there was a major overhaul of the tax laws. At that time the Modified Accelerated Cost Recovery System (MACRS) of depreciation was put into place. Since it has been almost thirty years, the vast majority of items in depreciation when this system was created have been either disposed of or fully depreciated under older systems. Therefore, we are going to concentrate our study on MACRS depreciation. If you have questions about older property that may still be in depreciation you might want to take a look at IRS publication 534, Depreciating Property Placed into Service before 1987.

Tomorrow we will review recovery periods, class life and conventions.

In accordance with Circular 230 Disclosure