Depreciation Methods

Technically speaking, U.S. tax law permits deduction from taxable income of a reasonable allowance for wear or tear, natural decay or decline, exhaustion, or obsolescence of property used in a trade or business or of property held for producing income. Specifically, the Internal Revenue Service requires that the following requirements be met for depreciable property:

1. It must be used in business or held for the production of income

2. It must have a life that can be determined, and that life must be longer than a year.

It must be something that wears out, decays, gets used up, becomes obsolete, or lose value from natural causes.

Depreciable property may be tangible or intangible. Tangible property can be seen or touched and can be categorized as personal or real. Personal property is goods such as cars, trucks, machinery, furniture, equipment, and anything that is tangible except real property. Real property is land and generally anything that is erected on, growing on, or attached to it. Land by itself, does not qualify for depreciation, but the buildings, structures, and equipment do qualify. In contrast intangible property cannot be seen or touched but has value to the owner; it includes copyright, brands, software, goodwill, formulas, patents, trademarks, licenses, information bases, and franchises.