Recovery Periods

• The recovery period for a depreciable asset is the amount of time that the IRS uses to classify an asset. It is the estimated useful life, as determined by the IRS. For example, the recovery period for office furniture is three years and for an automobile it is five years. This means that any taxpayer who elects not to expense the entire asset in the first year can depreciate the property over that period. The final tax deduction for the depreciation falls in the year following the total recovery period. Therefore, if you depreciate an automobile, you will take the final deduction in the sixth year.
  
  

Recapture

• If the percentage of an asset's use for business purposes falls below 50 percent, or you sell, trade or dispose of the depreciable property, some of the depreciation expense might be subject to recapture. When this happens, the portion of the depreciation expense for which you claimed a deduction, but which does not apply because of a change in how the property is used or ownership, should be returned to the IRS as income.
  
  

Depreciable Assets

• The IRS permits taxpayers to depreciate most tangible assets that are used for business purposes. If you use an asset for both business and personal use, you can usually take a proportional tax deduction to depreciate the portion used for business. In order to qualify for the depreciation deduction, you must own the property and it must have a determinable useful life of more than one year.
  
  

Nondepreciable Property and Costs

• You cannot claim a tax deduction for depreciation associated with property that you do not own. Specific property that does not qualify includes land, intangible assets and equipment used build capital improvements. Improvements to depreciable assets do not qualify for inclusion in the depreciation deduction of the current asset. This deduction must be taken separately.