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What is IRS Publication 946?

Writer's picture: Greg PacioliGreg Pacioli

IRS Publication 946, "How to Depreciate Property," is a comprehensive tax document that explains how businesses and individuals can depreciate property. Meaning that you can recover the cost of business or income-producing property over multiple years for tax purposes. This publication serves as the authoritative guide for understanding when and how to claim depreciation deductions on tax returns.



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Property Depreciation Fundamentals


Depreciation is the gradual deduction of an asset's cost over its useful life. Publication 946 explains that to be depreciable, property must meet 3 basic requirements:


1. Own the property

2. Use it to create income in your business

3. Have a determinable useful lifespan > 1 year


Types of Property Covered


The are several types of property that fall under Publication 946 depreciation rules categories covered are tangible property, and intagible property. Let's take a look at what is included in each.


Tangible Property:

Physical property you can see and touch, such as:


  • Buildings and their components

  • Machinery and equipment

  • Vehicles

  • Furniture and fixtures

  • Office equipment


Intangible Property:

Non-physical property such as:


  • Patents

  • Copyrights

  • Computer software

  • Other intellectual property


Depreciation Methods in IRS Publication 946:


The primary depreciation system used today, which includes:

- General Depreciation System (GDS)

- Alternative Depreciation System (ADS)


Allows businesses to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year, up to certain limits.


Permits immediate deduction of a percentage of an asset's cost in the year it's placed in service, with the remainder depreciated over its useful life.


Special Provisions and Rules

Listed Property


The publication defines "listed property" as items that can have both business and personal use, requiring stricter recordkeeping requirements, such as:


- Passenger automobiles

- Other transportation vehicles

- Computers and peripheral equipment

- Property used for entertainment


Recovery Periods


Publication 946 provides detailed tables showing the recovery period (depreciation timeframe) for different types of property. For example:


- Office furniture: 7 years

- Residential rental property: 27.5 years

- Commercial buildings: 39 years


Annual Updates and Changes


The IRS updates Publication 946 annually to reflect new tax legislation, changed depreciation limits, updated recovery periods, and modified bonus depreciation rates. Recent significant changes have included adjustments to Section 179 expense limits, revisions to bonus depreciation percentages, and new classifications for qualified improvement property, ensuring taxpayers have current guidance for maximizing available tax benefits.



Additional Resources:


- Form 4562 (Depreciation and Amortization)

- Form 4797 (Sales of Business Property)

- Publication 544 (Sales and Other Dispositions of Assets)

- Publication 551 (Basis of Assets)



Necessary Documentation for Property Depreciation

To accurately claim depreciation on a property, you’ll need the following:


  • Purchase records and receipts: Proof of the property's cost.

  • Business use percentage: Documentation showing the portion used for business purposes.

  • Improvement and maintenance records: Details of upgrades and repairs.

  • Disposition records: Evidence of asset sales, transfers, or disposal.


In Conclusion

Familiarizing yourself with IRS Publication 946 is essential for business owners and tax professionals managing depreciable assets. This guide ensures compliance while maximizing tax benefits through accurate depreciation strategies and calculations.

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