Depreciation convention

Refer to the rules or method used to determine the timing and calculations of depreciation expenses for eligible property.

These conventions help allocate the cost of acquiring a fixed asset over its useful life.

What can be depreciate?

Property that can be depreciated:

• The asset must be owned by the business. The asset can be subject to a debt and still be considered owned.

• The property must be used in the business or an income producing activity.

• Asset must have a determinable useful life.

• Asset must be expected to last more than one year.

Property that can bot depreciate:

• Land

• Leased Property

• Inventory

• Property placed in service and disposed of in the same year.

• Equipment used to build capital improvements. Equipment should be added to the basis of the improvements.

• Certain terms in interest property

• Section 197 Intangibles(Publication 946, Form 4562)

Class Life

The number of years over which an asset can be depreciated. The tax law has defined a specific class life for each type of asset.

3 year property

Useful life of 4 years or less:

• Tractor unit for over the road.

• Non-race horse over 12 years of age.

• Race horse over 2.

• Rent to own property.

5 year property

Useful life of more than 4 years but less than 10 years:

• Automobiles and light purpose trucks.

• Copiers and Scanners.

• Semi conductor equipment.

• Farm equipment.

• Cattle.

• Rental Real Estate such as furniture, carpet.

• Qualified Technological Equipment.

7 year property

Useful life of 10 years or more but less than 16 years:

• Office furniture.

• Used Farm Equipment.

• Rail road tracks.

• Natural gas gathering line.

• Certain motorsports property(Race Tracks).

10 yaer property

Useful life of 16 years or more but less than 20 years:

• Vessels, tugs, barges.

• Single purpose agriculture or horticultural structure.

• Tree or Vine bearing fruit or nut.

• Qualified small electric meter and Qualified smart electric grid system

15 year property

Useful life of 20 years but less than 25 years:

• Land improvements

• Retail motor fuels outlet

• Municipal wastewater treatment plant

• Initial clearing and grading for gas utility property

• Electric transmission property

20 year property

Useful life of 20 or more:

• Farm buildings

• Municipal sewers

• Initial clearing and grading land improvements or electrical utility transmission and distribution plants.

25 year property

• Property that is in integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this provision would be 20-year property.

• Municipal service other than property placed in service under a binding contract in effect at all times since June 9, 1996.

27.5 year property

Residential rental property:

• Building or structure such as rental (mobile) home.

• 80% or more of the income is from dwelling units.

39 year property

• Rental property that is neither residential rental property nor property with the class life of less than 27.5 years.

• Office building

• Store

• Warehouse